In today's Budget he confirmed that from April 2017, people can save up to £4,000 each year and receive a 25% additional bonus from the Government.
Savers can access money anytime "without the bonus and with a small charge".
However Osborne said he would consult with the industry on whether, like the American 401K, customers can return money to the account to reclaim the bonus.
Those who have already taken out a Help to Buy ISA will be able to roll it into the new Lifetime ISA and keep the government match.
From April 2016, the ISA limit will also increase from just over £15,000 to £20,000 a year.
George Osborne said:
"So put in £4,000 and the government will give you £1,000. Every year. Until you’re 50. You don’t have to choose between saving for your first home, or saving for your retirement.
"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.
"For the self-employed, it’s the kind of support they simply cannot get from the pensions system today."
Andrew Storey, Technical Sales Director, at financial forecasters eValue, said:
“Osborne’s Budget surprise of a Lifetime ISA for the under 40s is set to rock the boat. 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. Instead, the combination allows them to save for their first home and for a comfortable retirement.”
Simon Healy, Managing Director for Savings at Aldermore, added:
“There is understandable concern that younger people do not have the means or incentive in today’s low interest rate environment to save for a rainy day or for goals such as a deposit for their first home. The take up of the Help to Buy: ISA proves that younger savers will put money away if they’re rewarded and I suspect the Lifetime ISA will be just as popular. It’s an important announcement and something we welcome strongly. I don’t believe that this will kill off pensions, but it is certainly a more flexible and simpler product for a generation who need to save more.
“Along with the Personal Savings Allowance which comes into force in April this year, followed by the increase to the ISA allowance from April next year, this can only help savers in the long term and is a good outcome for all.”
