The bonus on ‘Lifetime ISAs’, George Osborne’s new savings vehicles for under 40s, should be doubled according to a top pensions analyst.

Michael Johnson, research fellow at think tank the Centre for Policy Studies, says the UK government should boost its contribution rate from 25% to 50%.

It comes after UK Chancellor Osborne unveiled the new savings products in his latest budget.

From April 2017, young people in the UK will be able to contribute up to £4,000 a year into the new savings products.

The government will then top up £1 for every £4 saved, helping individuals save for their first home or other ‘life events’.

The scheme is expected to cost the Treasury £850m in 2020-21, rising steadily from £170m in 2017-18.

But Johnson, a former investment banker at JP Morgan, reckons the Treasury should boost its bonus rate to 50% and fund the increase by terminating higher rate tax relief on pension contributions.

“Older, wealthier, workers may be placated by the thought that their loss could be their children’s gain,” the analyst says in a new report.

The pensions expert, who also worked at Towers Watson, is a vocal supporter of the new Lifetime ISA and hailed Osborne’s announcement last week as a “triumph for savers”.

However, his latest study suggests string of modifications, including doubling the contribution cap to £8,000 and setting up a low-cost default fund, with an opt-out to allow savers to embrace “freedom and choice”.

Linkages with Cash ISAs also need to be built, he says, to encourage a culture of “investing” rather than cash “saving”.

Threat to auto-enrolement?

The announcement of the Lifetime ISA was immediately condemned by some in the pensions industry, even though the population at large may like it.

The cited concern is that the existence of the Lifetime ISA could undermine auto-enrolment, by encouraging savers to opt-out (thereby losing out on employer contributions).

Dean Mirfin, technical director at Key Retirement, said that Lifetime ISAs may well seem a great addition, especially for younger savers, but could 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,” Mirfin said in a recent note.

But Johnson argues that critics are failing to recognise that some people may decide that the lifetime ISAs “just happens to be a more attractive product” than saving in a pension pot, better suited to their personal needs.

“The Lifetime ISA should provide some competition to the private pensions arena,” Johnson adds.

“But, hopefully, this is only the first step towards merging the disparate worlds of pensions saving and saving into a single, coherent framework.”

Ideally, he says that a Workplace ISA, encompassed in the auto-enrolment legislation, will similarly provide competition to occupational pensions.