The government will give savers £1 for every £4 they save into a new Lifetime Individual Savings Account (ISA), the chancellor has announced.
The new Lifetime ISA launches in April 2017 and will enable people between the ages of 18 and 40 to save up to GBP 4,000 a year and receive an annual 25% bonus of up to GBP 1,000.
Savers will be able to use ISA to buy a home or a pension, and withdraw from it any time without paying tax.
The Pensions and Lifetime Savings Association (PLSA) said the new ISA is an "interesting initiative" that will help younger people.
PLSA chief executive Joanne Segars said the organisation is looking forward to working with the government to help younger people build up their savings and intends to ensure the Lifetime ISA offers them good value.
She said: "An important part of this will be to make sure savers' interests are protected by ensuring the regulation on charges and governance of the Lifetime ISA are comparable to those for pensions."
Before the Budget, chancellor George Osborne had been considering introducing an ISA-style pension to replace traditional pensions – and some industry experts believe the Lifestyle ISA is simply a watered down version.
"The Lifetime ISA is ultimately a testing ground for the Pensions ISA proposed before the budget," said Steward Hastie, pensions partner at KPMG. "It gives the government the opportunity to see how consumers react to the ISA option."
The addition of the new savings option also raises the issue of whether it is better to save through a traditional pension or through the ISA system.
Pensions are tax free when money goes in, but consumers pay income tax when they take money out – whereas under the Lifetime ISA, money would be put in tax-paid but would be free of all tax when taken out.
It has left some experts warning of its long-term effects on the pensions industry.
Mick McAteer, director Financial Inclusion Centre, a think-tank, said there is a "huge risk" the Lifetime ISA will undermine pensions contributions, undoing the hard work undertaken to get people saving.
Others have expressed specific concerns about the potential clash between the new ISA and auto-enrolment.
Senior consultant at Barnett Waddingham Malcolm McLean said: "In a sense, given that people only have so much money they can dedicate to saving, the Lifetime ISA could be seen as a competitor to conventional pension saving."
"According to recent Office of National Statistics figures, young people by and large are not opting out when automatically enrolled into a workplace pension and hopefully this will not encourage more of them to do so."
Patrick Bloomfield, Partner at Hymans Robertson said: "It could also be a forerunner to the end of pensions as we know it - it's essentially a new pension regime through the backdoor and the first step on the path to a pensions ISA for all."
First published 17.03.2016
Lindsay.sharman@wilmingtonplc.com
