The account, available from April 2017 to those aged 18 to 40, essentially pays the saver an added 25% bonus for any money accumulated before they turn 50.
The incentive is equivalent to the tax-free savings on pensions currently available to a basic rate taxpayer.
Home Deposit
The chancellor was keen to point out that both savings and the bonus can be also used towards a deposit on a first home worth up to £450,000 ($634,477).
Those using the Help to Buy Isa introduced in December 2015 can transfer the savings or continue to save in both, although they will only be able to use the bonus on one to buy a house.
He said: “You don’t have to choose between saving for your first home, and saving for your retirement.
“With the new Lifetime Isa the government is giving you money to do both.”
“For the basic rate taxpayer, that is the equivalent of tax-free savings into a pension, and unlike a pension you won’t pay tax when you come to take your money out in retirement.”
The chancellor confirmed that unlike a pension, savers will be able to access their money at any time without the bonus – albeit for a small fee.
Osborne also announced the possibility of introducing an American-style 401K system – whereby a saver can return the money to a Lifetime Isa and reclaim the bonus.
Does it discourage auto-enrolment?
Industry experts are cautious of the move, warning that the Isa could act as a barrier to pension savings for the young and threaten the hugely popular auto-enrolment of pensions in the workplace.
Dean Mirfin, technical director at Key Retirement, said: “The introduction of the lifetime Isa giving greater access and incentives may well seem a great addition, especially for younger savers but could this be yet another barrier to pension savings where there is commitment and focus on retirement.
“At a time when auto-enrolment is engaging well with younger workers could this pose a direct threat to the one thing the government has worked hard to create – a workforce focussed on a secure retirement.”
However, Andrew Storey, technical sales director at financial forecaster eValue, believes that the Lifetime Isa can be used by savers to maximise the employer contribution benefits of auto-enrolment but warns that it must not be seen as an alternative to saving into a pension scheme.
He said: “Generation Y can now combine the employer contribution benefits of auto-enrolment with this new government boosted Isa to maximise savings like never before.
“However, young people must understand that it’s crucial to keep saving into a pension scheme, and not to see the Isa as a simple alternative.”
