Introduction

• There appears to be more recognition than ever of the difficulties first time buyers – the majority of whom are millennials – are having trying to get onto the property ladder. On first glance the Lifetime ISA (LISA), along with the Help to Buy ISA, is just another tool the UK government is using to add at least a little more balance to the system. But in reality, the LISA is more than that.
• The LISA is also trying to help solve – or at least reduce the size of – another big headache for every Western Government: how to get young generations to save more for their old age, which is likely to be longer and more expensive than any previous generation.
• The aim of this piece is four-fold: (1) Highlight the key components of the LISA which everyone needs to be aware of (2) Discuss the specific benefits and drawbacks as a tool to save for your first home (3) Discuss specific benefits and drawbacks as a tool to save for your retirement (4) Share what I’ve done so far and how that might change in the future.

LISA: The Key Information

• A Lifetime ISA (LISA) is a new savings account that allows you to save for a property and/or retirement without paying tax on the interest that you earn, it came into being on the 6th April 2017. It also offers a government bonus of 25% on everything you save. The bonus will be added to your account regularly (monthly after the first year), so you can also earn interest on the bonus.
• The money you save will be available to you either when you buy your first property or when you reach the age of 60.
• The maximum amount you save into LISA is £4,000 a year, if you put in that amount each year then, with the government bonus of 25%, you’ll have £5,000.
• The Government bonus is paid until you hit age 50.
• The maximum bonus you could get from a LISA is £32,000 (under the current rules), however to achieve this you would have to open it on your 18th birthday and contribute the maximum £4,000 each year until you are 50, when the bonus stops being paid.
• You must be aged between 18 and 39 to be eligible to open a LISA.
• If you withdraw from your LISA early, not for a deposit on your first home, then you will be penalised, badly. Withdrawing early will see you landed with a 25% penalty on the amount withdrawn. For example: If you put £1,000 into your newly created LISA in April 2017 and then no more money, at the end of the year you’d get a £250 bonus from the government, so £1,250 (ignoring any interest earned). If you then need to withdraw the full amount in cash, you’d be hit with the 25% penalty, in this case £312.50. Therefore you’d only get £937.50 back, less than you’d originally put in 12 months before.
• As alluded to earlier, the government bonus is paid monthly, allowing you to benefit from compound growth. The exception is the first year (2017-2018) where the interest will only be paid at the end of the financial year.
• It does not cost you anything to transfer a LISA once it is created, meaning you can transfer between suppliers easily to get the best return on your investment over the timeline you hold the account. This point is especially important given the fact that the current availability of LISAs is extremely poor. None of the high-street banks are providing them as of today, significantly limiting your choice. For a full list of the of providers I suggest checking out the bottom of the one of these pages: http://www.moneysavingexpert.com/savings/lifetime-ISAs  or http://www.which.co.uk/money/savings-and-isas/isas/guides/lifetime-isas

Saving tool for first time buyers

• With the key aspects of the LISA defined and understood, I now want to discuss in more detail the pros and cons of using your LISA as a saving tool for your first home.
• For clarity, if you are already a home owner then you can’t use the LISA to purchase another home or to save for renovations to your current home, so this section does not apply to you.
• On first sight the LISA appears to be a no brainer for first time buyers, who else will guarantee at 25% bonus on the money you save, even if the limit is only £4,000 a year?
• Even on second and third view it still looks very good, there are however a few things you should be aware of:
  • The house you choose as your first home must cost less than £450,000. For the clear majority of people, including everyone living outside London, this won’t even register as something to acknowledge, but for a select few this can be very important. It is worth noting that is condition is slightly different to the Help to Buy ISA which can only be used on houses only up to £250,000 outside of London, although the same £450,000 limit exists for within London.
  • You must have held the account for at least 12 months. You’d need to wait this long to get the first government bonus anyway, but this is an important consideration if you are looking to buy in the next year, more detail on that later.
  • You need to be buying the house with a mortgage. Again, this will only affect a very small number of people, but definitely something to be aware of. You must be getting a mortgage to purchase the house to be eligible to use your LISA to help fund purchasing your first home.
• If the above three caveats don’t apply to you, creating a LISA to help fund your deposit on a first home is a great idea, and it gets better. If you are purchasing your house with another first-time buyer you can double down on the bonus if they have a LISA as well.
• The second point above is most likely to affect the greatest number of people, so I’ll cover it in more detail now:
  • If you intend to buy a home before April 2018 – If you are close to buying a house or will be in the next 1 year I’d suggest sticking with, or opening, a Help to Buy Isa. You only get your government bonus with a LISA after holding it for 1 year, therefore you won’t benefit from the LISA’s main advantage.
  • If you’re planning to buy a home in 1.5+ years’ time – I’d still suggest opening a LISA, the amount you can save is higher so you’ll get more of a bonus from the government. While the Help to Buy ISA is restricted to a £200 per month deposit cap, you can add the year limit in a lump sum to the LISA, increasing the amount of time you’ll gain interest on it – after you’ve had the account for one year.
• Two important side notes for those of you who are sticking with your Help to Buy ISA. With a Help to Buy ISA you only get the bonus after you complete on your house, meaning it can’t be used as part of your initial deposit. The LISA doesn’t have the same restriction meaning you can use both your LISA savings and the government bonus to put down a deposit once you’ve exchanged contracts. Secondly, it’s worth noting that you can hold both a Help to Buy IS and a LISA at the same time, however you can only use the government bonus from one of these to buy your first home.
• If you want to open a LISA to help buy your first home, don’t forget about it once you’ve achieved this. You can continue to save in the same account after you’ve removed money for a house purchase to save for your retirement. For example, you could save £12,000 over a few years, put that towards your first home and then keep saving money in the same account to be withdrawn when you retire.
• Lastly, if you are using a LISA to help you become a first-time buyer, then think about what type of LISA you should get; Cash or Stocks & Share. As a rule of thumb, if you are looking to buy in the next 2 -3 years I’d suggest going with a Cash ISA because your capital will be at less risk of depreciation, so you’ll know exactly how much you’ll have when it comes to purchasing. This’ll mean you don’t run the risk that the market could tumble, and you don’t have enough time for it to rise again to re-coup losses. If you have a longer buying horizon though I’d suggest a Stocks & Share ISA, because the potential gains are greater.

Using LISA to save for your retirement

• For most millennials using a LISA to save for a first home is a good idea, however the debate about if a LISA is a good tool for saving for retirement is a more complex matter.
• Let’s start with the reasons experts are not giving the LISA a big thumbs up as a pension saving tool:
  • Pension saving is pre-tax, LISA is post-tax. If you’ve looked at your pay check carefully you’ll see that the money you put into your pension comes from your gross income, that means your pre-tax income. Whereas by the time you get hold of your money to transfer into a LISA the tax man has already taken his cut. My first thought when reading this was so what, the difference can’t be that big…how wrong I was! If you are a higher-rate tax payer (earning more than £45,000) you basically get a 66% contribution from the government for your pension contribution due to it coming out pre-tax, significantly more than the 25% bonus you get with a LISA.
  • Employer contributions to your pension. With a pension your employer, legally, must pay in when you do. Currently this is 1% of your ‘qualifying earnings’, rising to 3% in 2019. In reality, most big companies offer more than this, in my case my employee pays 5% of my salary into my pension each month. Employers won’t add anything into a LISA on your behalf.
  • Pension is available from 55. This point is probably the least important of the three because it is the most likely to change over the years, but currently you can take money from your pension at the age of 55, but with a LISA you have to wait until you are 60, unless you are willing to be hit with the 25% penalty.
• However, this is not all one-sided, there are a few key points which are in favour of the LISA as a tool for retirement saving:
  • At age 60 you have more flexibility. Although you have to wait a few extra years to access the money in a LISA you do get more flexibility to use that money as you see fit than with a pension. Currently with a pension you can only take a 25% lump sum when you retire, with a LISA you can take the full amount. Remember at 60 you would have already stopped getting the government bonus for 10 years, so it will probably be time for you to move the money anyway.
  • Not everyone is a top rate tax payer. Above I compared the 66% benefit higher-rate taxpayers get on pension savings, however most people aren’t higher-rate tax payers, and basic rate taxpayers the rate comparison is much closer. Again, the money you save in a pension is pre-tax, so it only costs you £80 from your pay packet to save £100. With a LISA, you have to put the money in post-tax, so you have the £80, add the government bonus of 25% and you’ve got £100 again. Although it is worth noting that this example doesn’t include your employee contributions or any additional gains your pension may achieve. I did say that using a LISA as a pension saving tool was more complicated!
• I’ll try to break it down and provide my personal perspective, but this really is something I encourage you to look at closer, based on your unique situation.  On the whole, if you are employed you should pay into your employer’s pension scheme, the pensions pre-tax saving status and the fact your employer also pays in is hard to fight against. The same goes if you are a self-employed higher-rate taxpayer, primarily use your pension. If, however you are a self-employed basic rate taxpayer, the choice is yours, the difference is extremely small.

 

What I’ve done

• Now that all the benefits and drawbacks are detailed and I’ve shared my broad stroke opinion on how different people might want invest, I’ll tell you what I have done.
• I have created my LISA, did so on 6th April 2017, and to date I’ve put £1,000 into it. I aim to contribute £250 per month over the next year to hit the maximum contribution of £4,000 by the end of the tax year.
• Why only £1,000 now? Because I don’t have £4,000 available right now to lock away and not be able to touch. Even if I did, due to the limited offerings of the LISA I want to see how things play out in the next 3-9 months, will the high-street banks offer it, what will happen next?
• Where? I have decided to open my LISA with Nutmeg, I did this for two main reasons; (1) they are one of very few companies to offer a LISA as of 6th April 2017, (2) I already have a stocks & shares ISA with Nutmeg so was very easy to create a new ‘pot’. To find more information about my other investment vehicles check out this post.
• Considering I am likely to be buying a house in the next 2-4 years I do not want to leave my LISA in stocks & shares for a long time, once the high-street banks get on-board I will likely transfer to a cash LISA –for free. Once my house is purchased I will most likely move my LISA back to stocks & shares as I feel this is the better long-term place for gains, I just don’t want to risk losing money in the market in the short term.
• It’s important to note that my pension absolutely remains my number 1 vehicle of retirement saving, at this stage at least. I’m using my LISA to help save for my first home and then I’ll re-evaluate my options after that purchase. My current leaning is that keeping my LISA as a secondary retirement saving pot might be useful – 90% pension, 10% LISA – but that could well change in the future.

Conclusion

• Overall the Lifetime ISA is a nice little tool that the government has provided to help not only potential first time buyers but also millennials & generation X to take action now to prepare for their retirement.
• However, you must ensure that it is the right investment tool for you. At the moment it’s much better for first time buyers than as a pension tool on the whole, but that could change over time.
• If you are reading this and thinking ‘this is all great but I barely have enough money to save anything at the moment’, then I’d highly recommend ignoring both a LISA & and Help to Buy ISA and ensure you are registered to your workplace pension.

 

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