A major announcement in Chancellor George Osborne’s 2016 budget yesterday was the introduction of a Lifetime ISA, designed to help young people save for the future.

What is the Lifetime ISA?

ISAs already exist in several forms, and is essentially a tax free savings allowance. However, as part of Osborne’s plan to “put the next generation first”, those under 40 in April 2017 will be able to open a Lifetime ISA, save up to £4000 a year and receive a 25 percent top up from the government. So for every £4 you save, the government will add an extra £1.

Sounds good. Should I open one?

Whilst it sounds like a win-win situation, there are several conditions attached. Many of these are restrictions on how the money can be spent, which are limited to buying a first home (up to £450,000), accessed from the age of 60 as a pension, or other ‘life events’, such as a terminal illness.

Essentially, unless you want to save your money for a house or your pension, the Lifetime ISA isn’t for you; if you access the funds for anything else, you will not qualify for the bonus and have to pay a 5 percent fee on top.

Should I use the Lifetime ISA to save for a pension?

The announcement of the Lifetime ISA has raised eyebrows due to its similarity to a pension scheme, raising the question – when saving for retirement, is it better to save through a traditional employer pension scheme, or with the Lifetime ISA?

Tax is paid on both a some point – money going into a Lifetime ISA is tax-paid but free to take out, and with the employer pension scheme its not-taxed going in, but tax is paid when it is taken out.

It is slightly more flexible than a pension fund, but operates in a similar way. However, The Treasury is keen to stress that this account is not a pension and can run alongside other long-term savings – you can still pay into a pension and get tax relief on your contributions and benefit from the lifetime ISA bonus at the same time.

What other changes were made to ISAs in the budget?

From April 2017 the tax-free savings limit will rise to £20,000 a year, up from the £15,240 currently.

The Help to Buy Isa scheme, which is currently in place to help first-time buyers, is due to end in November 2019. However, the new ISA scheme offers slightly more for your money.

Miranda Wadham on 17/03/2016