Savings (Government Contributions) Bill

Explanatory Notes

Policy background

2 The government is committed to supporting people at all income levels and all stages of life to save, recognising the important role that savings can play in promoting aspiration and supporting households’ standards of living. Over recent years the government has introduced a range of reforms to promote saving and ensure that the right incentives and products are in place to meet savers’ needs. This includes reforms to the Individual Savings Account (ISA) system, changes to the pensions system to provide people with more freedom and choice over how to access their retirement savings and the introduction of the Personal Savings Allowance, which removes 17 million people from tax on their savings.

3 The government also recognises the need for targeted incentives to promote saving among particular groups. During the last Parliament, the government helped over a million pensioners save through National Savings & Investments’ (NS&I’s) market leading 65+ guaranteed growth bond.

Lifetime ISA

4 At Budget 2016 the government announced that it would introduce the Lifetime ISA from April 2017.

5 The Lifetime ISA will help young people save flexibly for the long-term throughout their lives. It will help them to simultaneously save for a first home and for their retirement, without having to choose one over the other. The Lifetime ISA is designed to work with the grain of existing ISA products and to be simple for savers to use. It will harness the ISA model, where contributions are made out of post-tax income but investment growth on savings and future withdrawals are tax-free.

6 From April 2017, UK residents and Crown Employees and their spouses or civil partners, aged between 18 and 40 will be able to open a Lifetime ISA with an approved account provider (plan manager) and pay in up to the annual Lifetime ISA limit (£4,000) each tax year. The government will then add a 25% bonus to the amount paid into the Lifetime ISA. This means that individuals who save the maximum will receive a £1,000 bonus each year from the government.

7 Savers will be able to make Lifetime ISA contributions and receive a bonus from the age of 18 up to the age of 50. The Lifetime ISA plan manager will claim the bonus from HMRC and pay this into the individual’s Lifetime ISA.

8 Subject to certain conditions, Lifetime ISA savings, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after first saving into the account. The funds, including the government bonus, can also be withdrawn from the Lifetime ISA from age 60 tax-free for any other purpose. Lifetime ISA holders can also access their savings and government bonus if they become terminally ill.

9 Account holders will also be able to make withdrawals at any time for other purposes, but with a 25% government charge applied to the amount of withdrawal. This returns the government bonus element (including any interest or growth on that bonus) to the government with a small additional charge applied. The government charge will usually be collected and paid to HMRC by the Lifetime ISA plan manager.

10 Account holders will be able to transfer their Lifetime ISA between plan managers. During the 2017-18 tax year only, savers who already have a Help to Buy: ISA will be able to transfer any funds (including interest) built up before 6 April 2017 into a Lifetime ISA without these amounts counting towards the Lifetime ISA contribution limit. They will receive a 25% government bonus on the full value of the transferred funds. From 2018-19 any transfers from a Help to Buy: ISA will count towards the Lifetime ISA contribution limit.

Help-to-Save

11 In his speech on life chances on 11 January 2016 the then Prime Minister set out the government’s intention to bring forward a new Help-to-Save scheme to encourage people on low incomes to build up a rainy day fund. Further details of the scheme were announced by the Prime Minister on 14 March, including the government’s intention to consult shortly after Budget 2016 on the framework for implementation and policy design of the scheme.

12 Help-to-Save will target working families on low incomes to help them build up their savings. The scheme will be open to around 3.5 million individuals who either receive universal credit and have minimum weekly household earnings equivalent to 16 hours at the national living wage, or receive working tax credit.

13 Help-to-Save will work by providing a 50% government bonus on up to £50 of monthly savings into a Help-to-Save account. The bonus will be paid after two years, with savers able to continue saving for a further two years, meaning people can save up to £2,400 and benefit from total government bonuses worth up to £1,200. Help-to-Save accounts will be available no later than April 2018.

14 Account providers will claim the Help-to-Save bonus from HMRC and pay this to the account holder. Account holders will be able to use the government bonus in any way they wish, and can withdraw their savings, including any bonus paid, at any time.

 

Prepared 6th September 2016