Monthly Bonus Payments on LISA - penalising regular savers?
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ewliin
Posts: 17 Forumite
I'm having trouble answering a question on how the monthly bonus on the LISA will be paid. Originally, they announced that the bonus would be paid annually, which made it quite simple. Pay in £4k over the year (lump or dripfed), and you get your £1k. Now, under pressure from providers, they have changed this to a monthly payment. This was on the basis that it allows savers to earn returns on their Gov. bonus over the year, but as far as I can tell it also MASSIVELY penalises anyone who was going to drip feed their lifetimes ISA.
I am unclear on how the monthly bonus will be calculated, but the only sensible method I can think of is that they will pay ~2% per month on the contributions you have made so far that FY (rough monthly equiv of 25%p/yr). You don't earn a bonus on the already-paid bonus (i.e. it's non compounding) or on your returns.
If you pay in £4k at the start, this is fine, and over the year, you will get your £1k. But, this will quite heavily penalise those who dripfeed in their money rather than pay in a lump. It also means the monthly bonus will dip quite considerably at the start of every financial year as in effect you start from a £0 balance for bonus purposes.
Some very rough calculations, using 2%/month as a rough 25%/yr equivalent:
Dripfeed in £333 a month, to get your max £4k contribution. 2%/month (non compounding) on your cumulative contributions comes to a £666 bonus. On the originally-announced yearly-bonus system, you'd have got a £1k bonus. This in effect reduces the Gov. bonus from 25% (if they'd kept it annual payments) to 17% - I think this is a heavier penalty than not being able to earn on your bonus throughout the year.
Am I missing something, or has the much-heralded "improvement" to the Lifetime ISA, that was pushed for by all the providers, actually resulted in a penalty for those that can't afford to put in £4k as a lump at the start of the FY?
I am unclear on how the monthly bonus will be calculated, but the only sensible method I can think of is that they will pay ~2% per month on the contributions you have made so far that FY (rough monthly equiv of 25%p/yr). You don't earn a bonus on the already-paid bonus (i.e. it's non compounding) or on your returns.
If you pay in £4k at the start, this is fine, and over the year, you will get your £1k. But, this will quite heavily penalise those who dripfeed in their money rather than pay in a lump. It also means the monthly bonus will dip quite considerably at the start of every financial year as in effect you start from a £0 balance for bonus purposes.
Some very rough calculations, using 2%/month as a rough 25%/yr equivalent:
Dripfeed in £333 a month, to get your max £4k contribution. 2%/month (non compounding) on your cumulative contributions comes to a £666 bonus. On the originally-announced yearly-bonus system, you'd have got a £1k bonus. This in effect reduces the Gov. bonus from 25% (if they'd kept it annual payments) to 17% - I think this is a heavier penalty than not being able to earn on your bonus throughout the year.
Am I missing something, or has the much-heralded "improvement" to the Lifetime ISA, that was pushed for by all the providers, actually resulted in a penalty for those that can't afford to put in £4k as a lump at the start of the FY?
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I'm having trouble answering a question on how the monthly bonus on the LISA will be paid. Originally, they announced that the bonus would be paid annually, which made it quite simple. Pay in £4k over the year (lump or dripfed), and you get your £1k. Now, under pressure from providers, they have changed this to a monthly payment. This was on the basis that it allows savers to earn returns on their Gov. bonus over the year, but as far as I can tell it also MASSIVELY penalises anyone who was going to drip feed their lifetimes ISA.
I am unclear on how the monthly bonus will be calculated, but the only sensible method I can think of is that they will pay ~2% per month on the contributions you have made so far that FY (rough monthly equiv of 25%p/yr). You don't earn a bonus on the already-paid bonus (i.e. it's non compounding) or on your returns.
If you pay in £4k at the start, this is fine, and over the year, you will get your £1k. But, this will quite heavily penalise those who dripfeed in their money rather than pay in a lump. It also means the monthly bonus will dip quite considerably at the start of every financial year as in effect you start from a £0 balance for bonus purposes.
Some very rough calculations, using 2%/month as a rough 25%/yr equivalent:
Dripfeed in £333 a month, to get your max £4k contribution. 2%/month (non compounding) on your cumulative contributions comes to a £666 bonus. On the originally-announced yearly-bonus system, you'd have got a £1k bonus. This in effect reduces the Gov. bonus from 25% (if they'd kept it annual payments) to 17% - I think this is a heavier penalty than not being able to earn on your bonus throughout the year.
Am I missing something, or has the much-heralded "improvement" to the Lifetime ISA, that was pushed for by all the providers, actually resulted in a penalty for those that can't afford to put in £4k as a lump at the start of the FY?
It's simple. Instead of the provider claiming the 25% bonus at the end of the tax year on contributions made during the year, they will claim it at the end of each month on any contributions made in that month.
So put in £200 in April 2018 and you'll get a £50 bonus paid in at the end of April 2018. The bonus isn't being paid until April 2018 at the earliest.0 -
Ah, so I've over complicated it by assuming the bonus would be averaged over the whole year.
So, you're saying, if you pay in the whole £4000 in April 2018, you get the entire £1k bonus paid at the end of that month, rather than split over the next 12 months?0 -
To give a further example, I could:
April 2018: Pay in £4k
May 2018: +£1k bonus - total £5k
April 2019: Pay in £4k
May 2019: +1k bonus - total £10k
May 2019: Withdraw £10k for paying for a house
So if you pay in £4k in April, you are eligible for a whole year's bonus even if you only keep it in the account for 1 month for that tax year (as long as you have met the 12 criteria by having it open the previous year(s))?0 -
To give a further example, I could:
April 2018: Pay in £4k
May 2018: +£1k bonus - total £5k
April 2019: Pay in £4k
May 2019: +1k bonus - total £10k
May 2019: Withdraw £10k for paying for a house
So if you pay in £4k in April, you are eligible for a whole year's bonus even if you only keep it in the account for 1 month for that tax year (as long as you have met the 12 criteria by having it open the previous year(s))?
Correct. That was the whole point of providers pushing the Government to allow them to claim bonuses from HMRC each month so savers get the benefit of compounding interest on the bonus. Pay in £4k in April, get the full £1k bonus at the end of April, rather than at the end of the tax year. However no bonuses are being paid for the first year, only from April 2018 onwards.
You will be charged 25% on any withdrawals - so once it's in it's got to stay in unless you use to it to buy a first house or at age 60.0 -
Last question - if your LISA is invested in stocks & shares, how is the bonus re-invested? Does it just go into the cash reserve of that account, waiting for you to buy fund/stock units (which I assume remains within your LISA wrapper), is it invested back into whatever your ISA is invested into (weighted across multiple funds), or will this be platform dependent?0
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Last question - if your LISA is invested in stocks & shares, how is the bonus re-invested? Does it just go into the cash reserve of that account, waiting for you to buy fund/stock units (which I assume remains within your LISA wrapper), is it invested back into whatever your ISA is invested into (weighted across multiple funds), or will this be platform dependent?
It will do. It'll be up to the account holder to invest it.0
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