Are the new ISAs worth it?

The new Lifetime ISA was in the news again last week as the government announced that it was still good to go with plans for the new savings scheme in April, as long as the Chancellor doesn’t decide on any changes in next week’s Budget.

Not all companies seem as keen as the Government, and several big names have already said that they will either delay the introduction of the scheme, or not introduce it at all.

And it’s not only the insurers that are confused. Many ISA users can’t decide if the new schemes are going to offer real value, and many people with ISAs are still unsure of the benefit the savings schemes are bringing them

Part of the problem revolves round confusion about when the money built up in the LISA can actually be used. When it was introduced the Chancellor said that it could be used either at retirement or when first time buyers purchase their first house. Of course if you can’t use it until you have actually completed on your house purchase then it can’t be used to help with your deposit – something that George Osborne seemed to suggest was central to its introduction when he announced plans for the LISA at his last budget.

And of course if you use it to help you buy your first home then you can’t use it when you retire, because you will already have used it!

I said when it was introduced that it would be the thin edge of the wedge and that the Chancellor would be encouraging people to use the LISA instead of pensions, and that the longer term aim would be for this type of product to replace the personal pension. The main reason for this is that when you invest in a pension you are entitled to tax relief on the money that you invest, and your employer doesn’t pay tax on any investments that they make on your behalf. This isn’t the case with an ISA – there is no tax relief available on investments into an ISA.

On the other hand you can take all of the money you have in an ISA at any time and pay no tax on it while most of the money that you take out of a pension will be taxed at your highest rate of income tax.

Difficult decisions for us all but it certainly seems that not all investment companies, and certainly not all savers, are persuaded by the Chancellor’s arguments for the Lifetime ISA yet.

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