BRITAIN is perilously close to a capital crisis. Britons have more personal debt than citizens of any other nation and, with an average debt per adult equivalent to 115 percent of average earnings, many people are hugely exposed to rising interest rates. In addition, British household savings are not sufficient to support rapidly expanding consumption.

In a new paper Introducing the Lifetime ISA, published today by the Centre for Policy Studies, Michael Johnson suggests that the Chancellor’s new ISAs do not go far enough to kick-start a savings culture. He urges the Government to undertake the following policy reforms: The Chancellor should merge the cash New ISA and stocks and shares New ISA into a single Lifetime ISA. In addition, today’s Junior ISAs should be folded into the Lifetime ISA. This would represent a marked simplification of the savings landscape.

When a baby’s name is registered, a Lifetime ISA should be automatically established with a parent-nominated provider. As a single account, it would serve savers from the cradle to the grave, thereby signalling the emergence of a lifetime savings agenda (as opposed to “pensions”).

For every £1 saved in a Lifetime ISA, the Treasury should contribute 50p, up to an annual allowance of £8,000. This Treasury incentive, capped at £4,000, would be paid irrespective of the saver’s taxpaying status. A total of £12,000 per annum is more than sufficient savings capacity for 90 percent+ of the population. This incentive would replace today’s tax relief regime,as described in this report’s sister paper Retirement Savings Incentives, published by the Centre for Policy Studies on 21st April 2014. Further contributions, up to a total annual limit of £30,000, would not receive any Treasury incentive. The proposed annual allowance and annual limit would be shared with pension products.

The Lifetime ISA would provide a degree of ready access to savingswhile simultaneously justifying the Treasury incentive, which demands a term commitment to saving. Withdrawals pre-60 would be limited to original contributions(i.e. not capital gains or accumulated income), provided that 50p were first repaid to the Treasuryper£1 withdrawn. Post-60 withdrawals would be taxed at the saver’s marginal rate of income tax.

The Lifetime ISA would be able to hold cash and investments as well as incorporating features that rely on passive acceptance, including a passively managed default fund(with underlying fund costs capped at 0.35 percent per year), and automatic reinvestment of all income.

By offering ready access to contributions and a generous up-front incentive (akin to a flat rate of tax relief of 33 percent),the Lifetime ISA would help engage Generation Y, in particular, with retirement saving, acting as a savings chameleon, incorporating both ISA-like and pension-like features. Crucially, savers would be able to choose between the two: they would be in control.