Key Post New British Lifetime ISA a step towards integrating pensions and home ownership

[Brendan Burgess]

I wrote a post a couple of years ago on this topic:

Integrating pensions and home ownership


The British Government has taken a step in this direction with their Lifetime ISA announced in last week's Budget.

Anyone between the age of 18 and 40 can open an account.
They can save up to £4,000 a year up to the age of 50
The Government adds a bonus of 25% to all contributions.
The fund grows tax-free
The fund can be used as a deposit to buy a first home worth up to £450,000
or
The fund can be taken tax-free any time after age 60.

Two first time buyers could thus save £8,000 each and get a £2,000 bonus

If the fund is cashed before the age of 60 and not used towards buying a house, the bonus is withdrawn and there is a 5% tax.

 

[Brendan Burgess]

So, how might a scheme like this work in Ireland?

For most people, they could not start saving until they start work which is probably around the age of 23.

If a couple saves for 7 years and buys a house at age 30.
They would save €56,000 (7 years by €8,000)
The state would add: €14,000
So they would have €70,000 + whatever return they get on the fund towards a deposit.

Of course, wealthy parents could exploit the scheme better, by gifting their kids €4,000 a year from age 18.

This would be more attractive than a pension scheme for younger people. They a 25% bonus, but it's not taxed when they draw it down, whereas pensions are.
It is also accessible earlier.

 

[Purple]

Of course, wealthy parents could exploit the scheme better, by gifting their kids €4,000 a year from age 18.

Yes, but those parents will have already paid over 50% tax on that €4,000.

 

[Firefly]

It sounds to me like a ploy to boost the property market. You'll essentially have this growing balance of cash that you can get your hands on, but only if you buy a property. Otherwise you'll have to wait until you're 60. Reminds me of the Marshmallow Test.

 

[odyssey06]

It seems like an attempt to boost the effective interest rate without actually increasing the interest rate.

 

[Sarenco]

This would be more attractive than a pension scheme for younger people.

Not necessarily. I would argue that a pension is still a much better deal for a higher rate taxpayer, particularly if they are receiving matching contributions from their employer.

Agree with Firefly that this is just another wheeze to prop up house prices.

 

[Brendan Burgess]

You'll essentially have this growing balance of cash that you can get your hands on, but only if you buy a property.

Well most people who save for a pension probably do buy a property. Of course, they could continue to rent and then they would have the money available to them from age 50 without buying.

 

[Brendan Burgess]

I would argue that a pension is still a much better deal for a higher rate taxpayer, particularly if they are receiving matching contributions from their employer.

If you are getting matching contributions from your employer, then you should maximise your pension contributions.

But for younger people who are higher rate tax payers, they could avail of this scheme and contribute to their pension fund later in life.

Even if your argument holds true, the tax system should not be designed where we are borrowing money at 3.5% while saving in a pension fund which is probably receiving a return of 0.6%. Effectively we end up borrowing money to lend to ourselves, which I have set out in this thread:

We should not start pension funds until we have our mortgage paid off

 

[Sarenco]

But for younger people who are higher rate tax payers, they could avail of this scheme and contribute to their pension fund later in life.

Well, you're effectively looking at the difference between relief of 40% and 25% on contributions. Admittedly drawdowns from 60 from the Lifetime ISA are tax free but the vast majority of people won't amass a sufficiently large pension pot for their drawdowns to attract income tax in any event.

I'm curious why you think pension funds will probably only return 0.6% (presumably per annum). The FCA takes the view that projecting a mid-point growth rate of 5% is reasonable and that would be much lower than the annualised return on a typical balanced fund over the last 30 years.

Like all "help to buy" schemes, the Lifetime ISA will simply be result in higher house prices so it's benefit to FTBs is largely illusory. It's certainly of benefit to existing home owners.