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Are Lifetime ISAs a way to help the 'Jams'?

Ed Monk, Fidelity Personal Investing, 18 November 2016

Up to now there haven’t been many clues to what next week’s Autumn Statement will contain, but signs are slowly emerging that could give an indication.

Reports today suggest Chancellor Philip Hammond will aim any assistance on offer at a group dubbed the "Jams" – the "just about managing" – including more ways to help them save.

Given that the savings regime, encompassing various types of ISAs and pensions, is now very complicated, this could mean any number of things.

ISAs are already being made more generous, with the amount that can be paid in each year jumping to £20,000 in April, so it’s debateable whether increasing it can really be said to helping the Jams, who are unlikely to have that much to put aside anyway.

We do know that the Government has already taken a close look at the system of pension tax relief, with an overhaul in mind. Most assume that would mean shifting the benefits of the system from higher earners to lower earners. It held off making changes in the Budget in March and, although a big announcement is not expected next week, that cannot be ruled out. Read more in my article on pension tax reform.

One candidate for possible Government action could be Lifetime ISAs, the savings plans that are yet to launch but about which there is growing discussion.

Lifetime ISAs as proposed will allow you to save up to £4,000 each year and qualify for a 25% bonus from the government on top. You get the bonus as long as you eventually withdraw the money held in the account to buy a house or after age 60. Your money can be held in cash or investments.

You have to be between 18 and 40 to open one and the bonus is offered until you hit age 50. Take the money out for purposes other than buying a house, or before age 60, and you’ll lose the bonus and a 5% penalty is applied.

The growing discussion concerns the potential for Lifetime ISAs to distract savers from the potentially higher benefits of pension saving.

Whether a Lifetime ISA bonus is more lucrative than pension tax relief depends on your tax rate now and in retirement, but the extra money that is typically paid into your pot from employers when you contribute to a work pension scheme means that this is by far the best option for retirement saving.

For example, from April 2019 those auto-enrolled into a workplace pension and paying basic rate tax will benefit from a 70% uplift on their net contribution, thanks to their employer’s contribution and tax relief. This compares to the 25% tax benefit under the Lifetime ISA.

Such is the concern that savers will make the wrong choice, two former pensions ministers Ros Altmann and Steve Webb, have warned about the potential for mis-selling, and the City watchdog, the Financial Conduct Authority, has beefed up the warnings that Lifetime ISAs will carry.

It’s possible that Philip Hammond will go further next week and announce more tweaks to Lifetime ISAs before they launch, and that this could be where efforts to help the Jams put more aside are aimed.

You can sign-up to keep updated on any new developments on our Lifetime ISA page.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into an ISA depends on personal circumstances and all tax rules may change. This information is based on our understanding of the proposed Lifetime ISA rules which may be subject to change. The value of tax savings will depend on your individual circumstances and all tax rules may change in the future. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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