The Budget 2016: Strengthening the Incentive to Save
This week saw the chancellor unveil his 8th Budget, bringing some good news for small business owners, by expanding and making permanent business rates relief and relaxing the restrictions on Entrepreneurs’ Relief. Savers breathed a sigh of relief as a much needed plan to provide real incentives to save, specifically for the under 40’s, was unveiled via the introduction of the Lifetime ISA (LISA). The LISA can be opened by anyone aged 18 to 40, and the savers will be able to contribute to the ISA up until the age 50.
The annual limit for saving into the Lifetime ISA will be £4,000, but savers will receive a bonus from the Government of 25% of the amount they save. The funds can be used either to buy a first home, or to save for retirement. After your 60th birthday you can take out all the savings tax free. You are able to withdraw the money at any point before you turn 60, but this will incur significant penalties. If you choose to go down this route, you will lose the government bonus, as well as any interest or growth on this. There is also a 5% charge.
The long term result of such a savings initiative will undoubtedly be mutually beneficial to both generation rent and future governments.
Pension savers were given some much needed light relief ahead of this year Budget, safe in the knowledge that any plans to change the way in which pensions are currently taxed had been put on hold.
Time and time again, we have seen governments make short-sighted tax raids on pensions. It doesn’t take a genius to work out that the heady concoction of the very recent introduction of pension freedom combined with any changes that are likely to discourage individuals from saving for retirement altogether, is a seriously dangerous combination for the future of our economy.
It will be the government of future retirees, who will be left to pick up the hefty benefit bill for those with insufficient retirement provision - the cost of which will eclipse any savings made through pension tax raids made today.
The LISA will put the current generation of renters in a stronger position to buy their own homes, which means that they will in turn, become less of a burden to the state in retirement.
In April 2017 the threshold for the higher 40pc rate will rise to £45,000, for many this is a long overdue change that will give the tax payer more disposable income to pay into preferred saving schemes such as pensions and ISAs. This additional cash, combined with the increase to £20,000 that can be saved in an ISA will nudge savers further in the right direction.
In a Budget that has been reported in the press as being “regrettably neutral” and “self-serving” it’s surely clear, that some clever saving incentives have been put in place to do the right thing for the economy for generations to come.