Saving for a Lifetime

First published on 19 of April 2016 • Updated 23 of January 2017

We are in the midst of a savings revolution. In a few short years, both ISAs and pensions have been transformed beyond recognition – and more change may be yet to come. Stuart Dewin of Questa Chartered peers into the future to explore the latest options for savers.

Two years ago George Osborne announced that pensions were changing. This heralded the coming of pension freedom, but it’s widely believed that the changes are not over yet. With every Budget there comes another new announcement about pensions, ISAs or both, and a bigger picture is starting to emerge: a growing emphasis on tax-efficient saving and planning for the future.

These ongoing changes will be most felt by anyone now aged between 18 and 40. But what do they all mean, and how can you use them to your advantage?

The guessing game: what’s yet to come?

Proposed changes to pension tax relief didn’t materialise in the recent Budget – but these may only have been temporarily shelved. In future the current system (based on a person’s income tax band) may be replaced by a flat rate of tax relief. This would penalise high earners but save the Government millions, and also motivate those on more modest salaries to increase their pension contributions.

There has also been more radical talk of replacing the current system entirely with a ‘pension ISA’, where contributions are not granted tax relief, but all withdrawals are tax free. The introduction of the Lifetime ISA (see below) has been seen by some as a step towards this. Meanwhile the ISA allowance has shot up, from £6,000 just a few years ago to £20,000 by 2017/18.

The trend seems to be a gradual blurring of the line between pensions and ISAs, as the Government encourages mainstream earners to save more and be less reliant on the state. Two goals stand out above all: getting on the property ladder, and saving for retirement.

With all these recent developments on the ISA front, now is an ideal time to take a step back and look at the various different types and how they can be used.

So many ISAs – what do they all mean?

Cash ISA / Stocks & Shares ISA

• The ISA allowance for 2016/17 is £15,240.
• You can invest the full amount in either a Stocks & Shares ISA or a Cash ISA, or split the amount between both types.
• You can now withdraw and replace money from an ISA without it counting towards your annual ISA limit, as long as the repayment is made in the same tax year as the withdrawal.
• Tax-free savings through ISAs do not count towards the new personal savings allowance.

Help-to-Buy ISA

• This is to be used as a deposit on a first home (i.e. the main residence of the account holder).
• You can save a maximum of £200 a month, plus an initial sum of up to £1,000.
• The Government adds a 25 per cent contribution (up to a maximum of £3,000) when the money is used for a deposit.
• To receive the maximum government contribution, individuals need to save £12,000 to reach a total savings amount of £15,000.
• It can be used to buy a home worth up to £250,000 or up to £450,000 in London.
• A couple with a Lifetime ISA apiece can save £24,000 plus a £6,000 bonus for a total deposit of £30,000.
• Funds in a Help-to-Buy ISA will be transferrable into a Lifetime ISA. Both kinds of ISA can be held at once, but only one will qualify for the Government top-up when buying a home.

Lifetime ISA

• Available from April 2017 to anyone between the ages of 18 and 40 with contributions until the age of 50.
• The ISA allowance for 2017/18 will be £20,000.
• Contributions each year will receive a 25 per cent bonus from the Government.
• Maximum annual contribution amount will initially be set at £4,000.
• Lifetime ISAs are designed to help save up a deposit on a first home (up to a value of £450,000) and/or to save for retirement. Savings for retirement can be withdrawn from the age of 60.
• Savings can be withdrawn at other times, but without with government bonus and at the cost of a five per cent charge.

Home or retirement (or both)?

With house prices so high, some young people may feel they have to choose between saving for a home and saving for retirement. For many, a home must seem like the most pressing priority.

The Lifetime ISA will make it possible in theory to do both at once, since those who use it to buy a home can then start to fill it up again for their retirement. At the moment, the Lifetime ISA seems like a useful add-on to the traditional pension, rather than a replacement for it. Whether it is the first step on the road to replacing pensions with ISAs, remains to be seen.

However we choose to do it, saving for the future has become more important than ever. House prices are at unprecedented levels, and unlike previous generations we can’t rely on the state pension to meet the cost of living in retirement. Plus, of course, we all have our ‘bucket list’ – so hopefully some of those savings can go towards achieving some unforgettable experiences. We just have to remember to save – because no-one can foresee the future.

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Stuart Dewin is a Director & Chartered Financial Planner with Questa Chartered. Working closely with solicitors and accountants, he provides comprehensive financial planning on a wide range of investments. Stuart is a Fellow of the Chartered Insurance Institute, a certified Financial Planner with the Institute of Financial Planning, and an affiliate of the Society of Trust and Estate Practitioners. For more information about Questa Chartered, go here.