Rumours are swirling that we’ll see big changes to the ISA regime in the upcoming autumn statement.
One of those rumours is that Chancellor Jeremy Hunt will increase the value of a home that can be purchased using a Lifetime ISA (LISA) from its current £450,000 limit.
If this is true it could help a lot of first-time buyers, especially those in the south who might otherwise be struggling to find a home worth less than this. However, changes to the LISA could also help transform retirement prospects too.
This article isn’t personal advice. Pension, ISA, and tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for your circumstances, ask for financial advice.
What is a Lifetime ISA?
The LISA was first introduced to help young people save for their first home or for later life. You can add up to £4,000 a tax year (as part of your £20,000 ISA allowance) and get a 25% bonus from the government.
It’s a useful retirement vehicle for the self-employed who pay basic-rate tax and can complement a pension. The 25% bonus works in a similar way to basic-rate tax relief on a pension, and the income can be taken tax free from age 60. If you’re self-employed, find out if a pension or a LISA is better for you.
You can also access money in your LISA early if you need to, which can prove useful in times when income becomes more erratic. However, this does currently come with a 25% penalty if it’s not used for a first-time home or for later life. So, you could get back less than you put in. Be aware, savings outside a pension (like in a LISA) could affect your entitlement to means-tested state benefits.
How could LISAs be better?
There are downsides to a LISA. The obvious one is the potential 25% penalty. This not only eradicates the government bonus, but also any hard-earned gains.
You can also only open a LISA between 18-40, and once you hit 50, you can’t add any more money.
Given that so many self-employed people are aged over 40, there are many who could be helped by a LISA that are missing out.
We’re calling on the government to make key changes to LISAs in the autumn statement to try and break down these barriers. These include:
- Reducing the penalty for early access from 25% to 20% – this means people would only lose the government bonus if they need to access their LISA early.
- We also think people should be able to open and contribute to LISAs up until the age of 55.
What we want to see in the 2023 autumn statement
Our savings and resilience comparison tool shows that expanding access to households aged between 40-55 could affect up to 680,000 households with a self-employed worker who pays the basic rate of tax.
To add to that, the reduction of the penalty could benefit 540,000 households aged between 18 and 39 with a self-employed worker who pays the basic rate of tax.
The potential benefit of such reform is huge. We believe that if the government makes these changes, we could help a group of people, who’ve so far been underserved by pensions, build a more resilient retirement for themselves.
Jeremy Hunt’s 2023 autumn statement – is the ISA allowance going to increase?
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