What the Budget means for savers

New initiatives for savers have been warmly received - but some concerns remain

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Budget 2016: Martin Lewis Explains New Lifetime Isa

The Budget 2016 was an exciting one for savers - who were offered a huge bump to their ISA allowance and two new savings vehicles.

Andy Cumming, Head of Advice at Close Brothers Asset Management, said: "The Chancellor has dispelled fears that long-term savers were in for a rough ride from this year's Budget.... ISA limits are leaping, and the new Lifetime ISA will provide younger generations with a completely new savings vehicle. All in all, there was very little negative for the average saver."

The most immediate impact will be felt by ISA savers, who will see their annual investment limit rise again to £20,000 next April.

Over the longer term, Osborne announced two major initiatives that between them could transform the savings scene.

The Lifetime ISA

This was a complete surprise, and qualifies as one of the biggest rabbits Osborne produced from his hat in this Budget. The idea is to provide a savings vehicle that encourages young people to put money aside for the future. It is meant to help people save for retirement, but provides more flexibility than pensions - because the money can also be used to fund a house purchase. The aim is to get young people more interested in saving.

This, the experts point out, is a group of people in desperate need of an appealing savings vehicle. Nick Curry, Director at rplan.co.uk, the online investment platform, commented: "Our research shows that 29% of millennials are not saving anything at all each month. We hope that this initiative will encourage those who aren't saving anything whatsoever to start doing so, and that those who do will feel encouraged to save more."

Simon Healy, Managing Director for Savings at Aldermore, pointed out that. "The take up of the Help to Buy: ISA proves that younger savers will put money away if they're rewarded and I suspect the Lifetime ISA will be just as popular. It's an important announcement and something we welcome strongly."

What is it?

The lifetime ISA is only for those under the age of 40. They are encouraged to save up to £4,000 a year in their ISA, and for every penny they put in, they'll get a 25% bonus from the government. It means they can get a bonus of £1,000 a year. They can spend the money on either a house or a pension. And they won't pay tax when they take the money out.

Mark Stopard, Head of Product Development at Partnership, has done the calculations, pointing out that: "An eighteen year old who opens one of these products and contributes the maximum (£5,000 including the Government Bonus) could have a fund of £375,000 at age fifty - which is substantially more than the current pot used to purchase an annuity."

However, the devil is in the detail. Mark Soper, co-founder of RetireEasy.co.uk warns for example that: "Savers will need to return the bonus element of the fund plus any interest or growth on it to the Government along with a 5% charge if money is withdrawn for any reason other than home purchase or retirement."

In future the government is looking into the possibility of offering more flexibility to spend and then top up funds in the Lifetime ISA - as well as borrow against funds in it. We will have to wait to see whether this flexibility will be introduced.

What about pensions?

There's also the question of what this means for pensions. Soper warns: "Lifetime ISAs may impact on an individual's decision to join a Workplace Pension plan, as the ability to save in both may prove difficult to low earners and younger savers alike. The allure of the ISA's early access and possible tax free withdrawals may lead to many workers withdrawing from or opting out of their workplace pensions with the associated loss of the employer's pension contribution. At best, it provides a layer of complexity for an individual to consider before joining a workplace pension plan - something that is counter intuitive to Automatic Enrolment. At worst, this could prove disastrous in the longer term for a healthy retirement plan."

Cumming adds: "The pensions freedoms have been all about providing more choice and flexibility, and the new Lifetime ISA fits the bill well. However, it will be crucial that individuals are educated about the relative merits of both traditional pensions and the scheme, lest we see auto-enrolment opt-out rates climb. This ISA should be seen as an extra weapon in the arsenal of savers, not a direct replacement for the DC pension at this point in time. "

Ben Simpson, CEO of Menzies wealth management also highlights that young people have so many demands on their cash that many will simply not be able to take advantage. He says: "There is of course a question as to whether young people can afford to contribute to a Lifetime ISA in addition to paying off student loans, renting a flat and of course contributing to their pensions through automatic enrolment. Indeed a cynic might suggest that the main beneficiaries of the Lifetime ISA will be young individuals with higher disposable incomes and of course those with wealthy parents."

Help to Save

For people on lower incomes, before the Budget David Cameron announced the introduction of a new savings scheme available to those on Universal Credit or working tax credits - called Help to Save.

The idea is that if people on low incomes can somehow manage to put money aside, the government will add 50% to every penny they save - up to £300 a year. They will have to keep the money in the account for two years to get the government bonus. However, if they can then roll it over for another two years, they will get another bonus. In total, therefore, by saving for four years, they could get up to £1,200 from the government. The question is whether that's an affordable proposition for many people on low incomes.

Brighter outlook

Both announcements come on the back of the change to savings tax, due to come into effect in April this year. This will mean basic rate taxpayers can earn £1,000 of interest before they have to pay any tax on it, and higher-rate taxpayers can earn £500 before being taxed.

While there are always questions and the threat of unintended consequences to contend with, it seems that things are looking brighter for savers. All they need now is for rock bottom rates to lift themselves out of the doldrums, and savers can really have something to get excited about.

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