Lifetime Isa rules ‘should be relaxed to benefit the self-employed’

The age limit for opening lifetime Isas should be raised from 40 to 55 to help more self-employed people save for old age, industry experts say.

And the usual penalties for making withdrawals before age 60 should be reduced specifically for the self-employed, the Government is urged.

Lifetime Isas allow under-40s to save for a house and their retirement at the same time, and are seen as a useful alternative to pensions for the self-employed.

Many self-employed people do not save money for a private pension, usually citing affordability and a lack of trust in pension companies and an understanding of how pensions work.

They do not receive free employer contributions towards their pensions, which is a strong incentive for people automatically enrolled in workplace plans not to opt out.

Once you’ve passed the milestone of buying a home, lifetime Isas are often inferior retirement products compared to a workplace pension for that reason.

You’re giving up free money if you stick with a lifetime Isa instead of squeezing in as many contributions as possible to your employer between the time you buy a house and your retirement.

> How do lifetime Isas work? Read our guide

‘The self-employed are not fans of pensions’

Financial firm Hargreaves Lansdown says: ‘Self-employed people save into other vehicles such as property and investments, but pensions are less popular.

‘The Lifetime Isa could especially help self-employed people who pay basic rate tax, as the 25 per cent bonus works similarly to basic rate tax relief on a pension contribution, but there is no tax when The money is withdrawn after age 60. ‘

Hargreaves says its Savings and Resilience Barometer, a measure of people’s financial habits, shows that only 23 percent of self-employed households overall are on track to earn a “moderate” retirement income in compared to 46 percent of households where someone is employed.

The influential annual Retirement Living Standards Report estimates what annual income people need for a minimum, moderate or comfortable retirement. For a moderate lifestyle, this works out to £23,300 a year for individuals and £34,000 a year for a couple.

Hargreaves says: ‘Lifetime Isas are currently only available to people under 40 and there is a 25 per cent penalty on withdrawals other than for a first home, terminal illness or retirement.

“Expanding access to the Lifetime Isa to households aged 40 to 55 could include an additional 680,000 households with a self-employed person paying the basic tax rate.”

Calls on the Government to allow people to save and receive bonuses on Lifetime Isa contributions up to age 55. Currently, you can open them up to age 40, and pay and receive bonuses up to age 50.

Hargreaves also calls for the penalty for unauthorized withdrawals to be reduced from 25 to 20 per cent for the self-employed, saying this could benefit 540,000 households.

Helen Morrissey, head of retirement analysis at the firm, adds: ‘The self-employed don’t like pensions.

‘The ebbs and flows of their income can make it difficult to save regularly, they do not benefit from an employer contribution under automatic enrollment and they are unlikely to want to save most of their money until age 55.

‘This has created a huge chasm when comparing their retirement prospects with those of their employed counterparts.

‘Lifetime Isas can make a real difference to the prospects of those who pay the basic rate of tax.

‘However, there are barriers preventing as many people as should from benefiting from a Lifetime Isa. The penalty for unauthorized withdrawals is discouraging, as it not only takes away the bonus but also some of your hard-earned savings.

“You can currently only open a Lifetime Isa if you are under 40, meaning many people are effectively excluded from a product that could really benefit them.”

Pensions ‘continue to be a labyrinth’ for the self-employed

“Self-employed workers have reasons to maintain a higher level of financial liquidity to help them manage the demand cycles for their services and protect themselves against threats such as late payments, non-payments and unplanned expenses,” said Andrew Chamberlain, policy director at the Association of Independent and Self-Employed Professionals.

‘With this in mind, self-employed people may be more reluctant to leave money out of reach until they retire, especially without the added incentive of additional contributions from an employer; and from the perspective of lower rate taxpayers, a comparatively greater tax relief. But this only delays financial deterioration until later in life.

He says IPSE wants savings products to better fit the reality of being your own boss, so it backs previous recommendations to extend the Lifetime Isa.

Craig Beaumont, head of external affairs at the Federation of Small Businesses, says: ‘Today’s proposal from Hargreaves Lansdown to improve Lifetime Isas is a useful suggestion.

‘At the moment, the pension system for this group remains a labyrinth, and many plan to build and then sell their businesses to have financial security in their old age.

‘We know this often happens too late and depends on external factors such as a strong economy at the point of sale and the maintenance of Entrepreneurs’ Relief (now renamed Disposal of Business Assets).

“We should also find a new way for the 88 percent of self-employed people who are former employees to continue contributing to plan providers.”

Asked to respond to calls to ease restrictions on Lifetime Isas, a Treasury spokesperson said: “HM Treasury is receptive to ideas about how we can make Isas more attractive to encourage people to develop a habit of saving and investing in a way that works for them. .’

The Government is keeping the Isa policy and its rules under review, and any changes will be announced at a fiscal event such as a Budget or autumn or spring statement.