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Another tax year, another Isa: is it one product too many?

Isa family tree

The new tax year is ushering in a new Isa – the Lifetime Isa. But is the latest addition to the Isa family taking what used to be a simple savings account too far from its roots?

Isas, are, without doubt, the nation’s favourite savings product. Their premise is simple – put money in, watch it grow without paying any tax, and take it out and spend it tax-free. You can see why 12.7 million Isas were opened in 2015 and British savers have shovelled £80bn into them.

But with Thursday’s launch of the Lifetime Isa – a new tax-free savings product designed to help people aged between 18 and 40 save for their first home or retirement – I’m beginning to worry that the Isa brand is at risk of being mutated beyond recognition.

Growing family

In recent years, we’ve seen Junior Isas, Help to Buy Isas, Inheritance Isas, Flexible Isas and Innovative Finance Isas, all launched to much fanfare.

Many of the recent changes have been for the better.

Removing the cash savings limits and adding the ability to transfer back and forth between cash and stocks and shares was long overdue. While changes to the inheritance rules on Isa savings brought them in line with the tax-free transference of assets to spouses and civil partners.

But with increasing complexity being added to the Isa range, could one bad version end up eroding the trust so many have in the brand?

Potential pitfalls

Last year, many young savers were caught out when they came to put their Help to Buy Isa savings towards buying their first home, only to find that the 25% government bonus could only be used on completion of sale and not on the exchange of contracts.

Meanwhile, Innovative Finance Isas – which allow you to invest in start-ups and through peer-to-peer lenders tax-free – have also made a slow start. No mainstream peer-to-peer lenders have launched one yet, and those that have are perhaps at the riskier end of the spectrum.

My concern here is not with the investment opportunities these new finance companies offer, but that some people may be tempted towards potentially inappropriate products simply because they fall under the Isa banner.

Lifetime Isa

That brings us to the Lifetime Isa.

On paper, it looks attractive – put in £4 and the government gives you a £1 bonus, to a maximum of £4,000 a year.

Use it to either save for your first home, or keep investing until you can access your savings tax-free when you hit 60. Access it before then, and you face a penalty charge and the loss of your bonus.

But does its arrival – and indeed the now huge £20,000 Isa limit – signal a much bigger change to the benefits you get for saving into a pension?

The government hasn’t been shy about its desire to reform how tax relief is added to your pension contributions, which can turbocharge your retirement savings but costs the Exchequer billions of pounds each year.

So far, it has backed away from a major upheaval, but is it willing to leverage the popular Isa brand to make a potentially unpopular cost-saving move?

The great appeal of the Isa has always been its simplicity. My concern is that one major scandal with these increasingly complex additions could do irreparable damage to a much-loved financial product.

 A version of this article first appeared in The Scotsman.

What are your views on the Lifetime Isa? Will you be signing up for it and why? Or do you feel bamboozled by the burgeoning Isa market?

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