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Bright Blue, the independent think tank for liberal conservatism, has today published new research, entitled The Lifetime ISA: enhance and simplify, calling on the Conservative Government, on the eve of the 2018 Conservative Party Conference, to significantly support the savings of younger generations by reforming the Lifetime ISA (LISA).

The research, authored by Associate Fellow and pensions expert Michael Johnson, calls on the Treasury – which is currently reviewing the future of the Lifetime ISA following criticisms from the Treasury Select Committee – to enhance and simplify the Lifetime ISA.

The analysis argues that this could significantly increase the popularity and usage of Lifetime ISAs, particularly for younger generations who are now considerably less likely to vote Conservative and less likely to acquire the financial income and wealth older generations enjoyed.

The report proposes three main reforms to the Lifetime ISA:

  1. Liberate the LISA of its age restrictions
    Contributions should be permitted from birth rather than from age 18 but, other than a £500 starter bonus, they should not attract the 25% bonuses until 18, and no access should be permitted until 18.
    A LISA could also be automatically established when a baby’s name is registered, with a provider nominated by the parents, as the personal saving equivalent of workplace auto-enrolment.
    In addition, the contributions age ceiling should be removed, with the caveat that any contributions made from age 50 onwards should be locked in for at least ten years (with allied bonuses).
  1. Introduce penalty-free access
    The 25% charge imposed on pre-60 withdrawals is widely misunderstood because it is not the same as the 25% bonus initially received.
    There is an implicit 6.25% ‘penalty’ which is not intuitive, it adds complexity and serves no consumer purpose. It should be eliminated, by simply reducing the withdrawal charge from 25% to 20%.
  1. IInclude the LISA to bolster Auto-Enrolment (AE)
    Employee contributions made under AE should be eligible for payment into a LISA, attracting the 25% bonus. This would provide improved access (to buy the first home, for example): the risk of rising AE opt-out rates should then diminish. All savings should be as personal as a bank account.

Commenting Michael Johnson, Associate Fellow of Bright Blue and author of the analysis, says:

“If these three proposals were implemented, then there would be no need for any other ISAs. The Lifetime ISA could serve as a single savings vehicle from cradle to grave.

The LISA’s 25% bonus, determined using contributions made from net income, is equivalent to 20% Income Tax relief. Consequently, for basic rate taxpayers, LISA savings are effectively entirely tax-free if kept until 60. Remarkably few people appreciate this fundamental LISA attribute. Conversely, the effective tax rate of pension pot assets is 15% for basic rate taxpayers.

In addition, the LISA contains a valuable free option; ready access when buying the first home, with accumulated bonuses then retained. Generation Y is slowly discovering that pension pots cannot compete with this.”

Commenting Ryan Shorthouse, Director of Bright Blue, says:

“The Conservative Government needs to do more to support younger people, for both political and moral reasons. Simplifying and enhancing the Lifetime ISA would offer those in their twenties and thirties significantly greater financial support and flexibility with their savings. It would be a clear and considerable policy that would show the Conservative Government is serious about supporting younger generations who want, but struggle more, to climb the ladder of life.”