Lifetime ISAs: Welcome boost or mass confusion for savers?

Available from April 2017 to people under the age of 40, it will provide a 25 per cent bonus from government funds. That means that a saver putting in the annual maximum of £4,000 will be treated to a £1,000 top-up, and can expect the same bonus until the age of 50.

It is intended that the Lifetime ISA be used for homes, after just one year, and for pensions, although savers wanting to use the money for retirement will have to wait until the age of 60.

The Lifetime Isa has generally been received warmly by the savings industry. Ian Sayers, chief executive of the Association of Investment Companies, said: “The Lifetime ISA is long overdue help for under-40s to save for their future – whether that’s a home or long-term saving for retirement.”

“This is an opportunity to generate a savings culture and boost long-term share ownership amongst millennials.”

Kevin Pratt, consumer affairs expert at MoneySuperMarket, called it a “radical surprise” and “a commendable initiative”, but added. “It’s hard to see at this stage if the launch of the Lifetime ISA will have any future effect on the state pension. It could well be that we see this being impacted at some point in the future.”

Steve Webb, director of policy at insurer Royal London, added: “Just at the point that millions of under-40s have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion.

“Young savers who opt out of pensions in favour of a lifetime ISA lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot – how will they know which is right for them?

“Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor’s desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.”

Mr Webb is a former Lib Dem Pensions Minister, but his comments strike a chord, especially in light of new research from SunLife. Looking at the savings habits of more than 3,000 households, it found more than a than a quarter of Britons have no savings at all. Among younger people, aged 18 to 34, 37 per cent have no savings, most of them because they don’t have any spare cash – either because they spend all their money each month (55 per cent) or they use any spare to pay off debts (35 per cent).

Of those under-35s who do save, almost two in five save in a jar – that’s more than have a Cash ISA – while more than half of young adults save using their current account rather than a specific savings product.

While higher savings rates among younger people may be desirable, the research suggests that many simply don’t have any spare cash to put aside.

Ian Cooper, head of savings at SunLife, said: “While putting pennies into a jar can be a good way of stopping yourself from spending loose change, jars and tins were never intended as secure homes for hard-earned cash.

“Not only is it very tempting to raid rather than leave for a rainy day, but it isn‘t earning a penny in interest and doesn’t stand a chance against inflation.

“Saving doesn’t have to be a huge commitment; just think about putting a little something aside each month because even a small amount of money saved or invested regularly can build into a sizeable sum over the years.

“Hopefully the chancellor’s announcement in [Wednesday’s] budget for the launch of a Lifetime ISA, where savers can get a 25 per cent bonus from the Government, will encourage more young people to start saving for their future.”