The Chancellor during his latest Budget introduced a new Lifetime ISA designed to help those under 40 save towards their retirement or a first home.
Under the scheme, savers will be able to deposit up to £4,000 each year, and receive a government bonus of 25 per cent, or £1,000 a year, in return.
Savers will benefit from the bonus if they use some or all of the money to buy their first home, or keep it until they are 60, to support their retirement income.
Anyone between the ages of 18 and 40 can open a Lifetime ISA and put savings into it up until their 50th birthday.
The new ISA will be available from April 2017 and there will be no maximum monthly contribution.
Savers can save as much as they want each month, but will only receive the bonus on the first £4,000 a year.
Accounts are limited to one per person rather than one per home, allowing two first-time buyers to receive the bonus when buying together.
Those with a Help to Buy ISA can transfer those savings into the Lifetime ISA in 2017, or continue saving into both, but couples will only be able to use the bonus from one of the ISA types to buy a house.
After a saver’s 60th birthday they will be able take out all of the savings tax-free. However, should a person wish to withdraw the money before they turn 60, they will lose the government bonus and any interest or growth on this. They will also have to pay a five per cent charge.
The Lifetime ISA has been met with a mixed response and some experts have accused the government of laying the foundations for a more comprehensive Pension ISA, which may one day, replace or support the national state pension.
Former pensions minister Steve Webb, said: “Just at the point that millions of under-40s have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion.
“Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor’s desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.
“We also wonder whether the Lifetime ISA will lead more people to direct savings towards a property, leaving less money for pension savings. So, as with all investments, savers should read the small print.”
Link: Lifetime ISA Fact Sheet