Martin Jones: Will pension tinkering push young savers into Lifetime ISAs?

Martin Jones looks at whether Lifetime ISAs might rise up the priority list for the millennial generation when the nation emerges from lockdown

In his March budget, Chancellor Rishi Sunak was thankfully short on surprises when it came to pensions.

However, they didn’t escape scot free as the Chancellor announced a freeze on the lifetime allowance for the next five years. (For the last three years it’s risen in line with CPI inflation.)

Perhaps with years of tinkering still fresh in the mind – the lifetime allowance has never stayed the same for more than two years at a time – some commentators described this latest move as a bizarre disincentive and the wrong message to savers.

Could the millennial generation therefore perceive the LISA to be a more stable product and a better home for surplus funds?

Given that the government bonus on a Lifetime ISA (LISA) works out the same as basic rate tax relief on a pension contribution, the up-front incentives work out the same. Withdrawals from a LISA are tax-free, whereas withdrawals from a pension aren’t (albeit there’s a 25 per cent tax-free lump sum).

And there are certainly some that believe a LISA could produce better outcomes for this cohort than a pension.

Yet to catch fire?

Anecdotally, however, it feels like the LISA has yet to catch fire with the general public thus far, perhaps due to its dual nature. (Is it for first-time buyers? Is it for retirement savings?)

And statistically too, the numbers are slightly lower than expected.

In its Impact Assessment, HM Treasury estimated there would be over 200,000 LISA savers in 2017/18, saving on average £3,500.

According to HMRC’s statistics, however, there were only 154,000 savers in that period, putting away on average £3,156.

That said, the total inflows over the first two years breached the £1bn mark, which is a not-insignificant milestone.

Tinkering

Of course, there’s nothing to stop HM Treasury tinkering with the ISA rules like they do with the pension rules.

However, it’s worth noting that the subscription allowances for ISAs and JISAs have only gone in one direction – and that’s up.

We’ve also seen rule changes that have broadened the general ISA proposition – for example, one-off subscription increases for spouses of deceased account holders, the ability to transfer a child trust fund into a junior ISA.

So it’s certainly possible to perceive the ISA as the tax wrapper with more momentum behind it from a policy perspective.

Product of choice?

When the next batch of ISA stats emerge later this year it will be interesting reading.

There may be enough savers in the UK who have seen their salaries stay level but their outgoings decrease to mean the overall ISA numbers remain fairly robust.

LISA inflows, however, could well be down given that millennials are generally in a more precarious position financially than other generations.

But when we emerge from lockdown conditions and younger savers are back in a position to start putting away surplus funds, it’s entirely possible that the LISA will be the wrapper they go to first.

Martin Jones is technical team leader at AJ Bell