In the 2016 budget, the British government announced the creation of an ISA (Individual Savings Account) that blows most other ISAs out of the water. To be unleashed on the good people of the United Kingdom in April 2017, the LISA (Lifetime ISA) effectively dishes out a 25% return on investment with up to £32,000 of real free money up for grabs (insert terms and conditions here). A Money Tree that cannot be overlooked, this ISA is set to revolutionise the UK housing market where nine in ten Britons between 16-34 are expected to not be able to afford to buy a house by 2025… Yet so many either do not understand it or do not know it even exists – enter Money Tree Man!
Firstly the way it works is, you can pay in up to £4,000 per year into this bad boy. At the end of the tax year, the government pays you 25% on the deposits. These deposits can be made however you like; monthly instalments, a lump-sum at the beginning, all of it paid in at 23:59 on 5th April 2018 – it really is up to you. Of course, there is only one little tiny bitty little catch; you can only spend it on either your first house, or after you turn 60 otherwise a penalty of 25% is payable. For example, Mr. Jack Daniels pays in £2000 in a tax year and the government throws £500 into his account – cue the champagne! He then decides that he wants to start collecting expensive whiskey barrels and so he withdraws it. Well, he’d stand to lose £625 (25% on £2500)… OK so maybe it is a bigger catch than I originally mentioned, but for those who are set on using it for their first home, it really is a no-brainer!* In a time where the average wage and the average house price is at it’s biggest gap ever, the timing of this ISA could not be more prudent, giving young savers from the ‘Generation Rent’ not only a chance, but a means to buying a house of their own.
Both the Money Tree Lady and myself are planning on maximising the benefits of the Lifetime ISA to throw at our first house. What this translates to is a healthy £6,000 – £8,000** of free money that over the lifetime of a mortgage saves a small fortune in interest payments. Needless to say that the MTL and I are very excited for this, with ‘Lifetime ISA’ replacing ‘cute kittens’ in MTL’s google search history***.
Is this ISA good for retirement? I will answer that honestly and say, I really am not too sure but if you, like me, are chasing financial independence then in my opinion it really is not for you. Locking away £4,000 a year until you’re 60 means that if you retired at 40, there will be two decades where you cannot access your own money without being penalised. And that is assuming the rules do not change in that time as they always do with state-involved retirement packages. When placed next to the multiple investment options at your disposal, the LISA really doesn’t compare as a retirement option. And even if you are not chasing financial independence, the LISA does not appear to trump the Workplace Pension. That being said, I’d be really interested to hear your thoughts on this so please leave a comment below.
And now for the bombshell, with delays of the details of the mechanics of the LISA not being published soon enough, high street banks have not had sufficient time to prepare themselves to offer this product. Come 6th April there may be very few banks actually offering this account. A few of the institutions that are set to offer the LISA are doing so as a fund, and so your cash will be held in stocks by fund managers (more on why I do not like them later). I would strongly advise against getting a LISA in this way as fund managers will charge you a fee that high street banks will not. Furthermore, your savings would be subject to stock market volatility that really is not ideal for short-term investing.
I will write more on this once we have more information on the Lifetime ISA, so watch this space!
*Quick note, this ISA is only open to UK residents aged 40 or below. Those who were born on or before 6th April 1977, unfortunately this isn’t for you – though you guys were alive to witness the birth of Star Wars so you cannot have it all your way!
** Amount depends on how long we save. It also assumes that we will have £4K each per year to deposit into the Lifetime ISA.
*** I won’t tell you what it has replaced on mine…