Published by Alexander Hitchcock on 15 March 2016
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- The Reformer Blog
30 March 2016
The recent Budget saw yet another announcement from the Chancellor on savings policy. As of April 2017, anyone under the age of 40 will be able to save up to £4,000 a year in a ‘Lifetime ISA’ (LISA). For every £4 deposited into these accounts, government will add a £1 bonus. Savers will have access to their tax free cash at 60, however first time buyers purchasing a home under the value of £450,000 will also have the opportunity to withdraw their savings and accumulated bonuses.
The scheme sounds generous, but the majority of savers preparing for retirement would be better served by sticking with a workplace pension. Employer contributions typically double the value of an individuals’ contribution, while ‘band slippage’ – whereby savers receive tax relief at a higher rate than the income tax they pay in retirement – has been a substantial, albeit controversial, perk for pensioners.
However many, including the Work and Pensions Select Committee, have raised concerns that the introduction of LISA might crowd out workplace pension saving. The ISA brand is well-respected; the product offers more flexibility than a workplace pension; and the 25 per cent bonus presents an immediate and tangible incentive to save.
These concerns are real, but of greater short-term consequence will be the effect of the Chancellor’s announcement on the housing market. Immediately after the Budget, Martin Lewis of Money Saving Expert labelled LISA a ‘no brainer’ for first-time buyers. The product is more generous than the already popular Help to Buy ISA, and couples buying their first home together will have the opportunity to save into two accounts – doubling their opportunity to receive government bonuses.
If the Government’s objective is to support homeownership, however, LISA is not the answer. The Office for Budget Responsibility estimates Osborne’s initiative will add 0.3 per cent to house price inflation by 2020. These forecasts are highly uncertain, but by the end of the Parliament, LISA might have increased the average cost of a home by £2,440. For savers who max out their LISA account, this is not so much of a problem – assuming a two per cent interest rate, the value of government bonuses by 2020 will stand at £4,122. However for those who can only put away half the limit, by 2020 the inflation caused by LISA will outweigh the benefits of accumulated government bonuses with interest.
Those unable to access a workplace pension – most notably the self-employed, a growing segment of the labour market that is particularly exposed to undersaving – will welcome Osborne’s announcement. Stimulating housing demand will not, however, help the Government secure its ambition to deliver a more affordable housing market. It may be easier said than done, but supply side reform is the only way to deliver the 200,000 starter homes the Government has pledged by the end of the Parliament.