Lifetime ISAs guide

masonic

kiwi_fruit wrote: »

Masonic, thanks for the detailed reply once again, I appreciate your time.
Yes I understand the bonus rate is paid on new deposit only and is not cumulative. When we tried to calculate overall return for maximum amount I'd be able to deposit (72k), over 28 years it appears to work out at around 2.20%, this is based on an account paying 1% + 15% bonus for the first 18 years. This is for cash ISA obviously, I imagine it's impossible to calculate possible returns from S&S version though as there's no guarantees.

Over long periods of time, you have to consider the effect of inflation, which makes the returns earned on cash impossible to calculate accurately either, but with a number of assumptions it is possible to get a guide. So, taking a 1% interest rate (which itself is variable), the 25% bonus, and inflation at an average of 2.5%, the rate of return on your cash LISA deposits would vary between:
Money saved this year (saved for 28 years): (£1+25%)^(1/28)+1% = 1.08%
Money saved in the last year (saved for 10 years): (£1+25%)^(1/10)+1% = 3.26%
Average interest earned on entire cash LISA is approximately 2.2% factoring in the bonus.
After average inflation, this is a loss of value of 0.3% per year even after the 25% bonus.

That's a pretty terrible outcome, which barely beats the current market leading 5 year fixed rate cash ISA (which has no 25% bonus).

However, things are slightly worse than that, because cash returns over long periods of time also suffer uncertainty due to inflation. If inflation were to pick up, like it did between 1960-1988, the average inflation over your 28 year investment period would have averaged 7.9%, meaning your cash would erode in value by 5.7% per year, which would mean the £78k you deposited would be worth less than half that in today's money when you reached 60 (or you could frame it as your money being essentially the same nominal value, but your living costs more than doubling).

So if using a cash LISA were your only retirement option, it would hardly be worth bothering with the additional red tape when you can get an almost as good rate with much more lenient terms and with near certainty that it wouldn't maintain its spending power. Fortunately it isn't your only option.

While just like cash, it is impossible to accurately predict how S&S investments might perform over long periods of time, there has been a lot of work done using historic data going back more than a century to determine the range of returns possible, and the likelihood of achieving such returns. The Barclays Equity Gilt Study points to an average return of 5% above inflation based on UK investments only, whereas a more global view is presented by Tim Hale in Smarter Investing of 6.3% above inflation. Whereas for Government bonds, typical returns are 1-2% above inflation. So what is the risk of a mixture of these investments doing worse than the best scenario for cash above? Based on data since 1900, the worst returns achieved for any mixture of S&S:Bonds was a 100% bonds portfolio, which kept up with inflation, but didn't beat it, whereas any mixture of S&S and bonds gave rise to a positive return over the worst 30 year period in the last century.

So in summary, you have the choice between:
cash: with an extremely likely outcome that the money you put in will be worth moderately less in today's money when you come to take it out, and the slight risk it will be worth significantly less.
S&S: with an extremely likely outcome that the money you put in will be worth considerably more than you paid in, and the slight risk it will be only worth slightly more.

Of course, there is a tiny risk that the future will be much worse than at any time in the last century or so and either cash or S&S would suffer a much more significant loss. There is no reason to think cash is any safer than S&S in this regard - in fact, the sort of economic collapse that would drive such a loss would likely affect both equally badly.

I really don't know anything about investing, and they say if you don't know what you're doing it's best not to. Have come across opinions that "index tracker fund" is the safest long term way of investing, so will have to read up more of that. I guess I'm really reluctant to think about investing as I don't like risks, however small, they give me anxiety.

Hopefully, I've been able to raise your awareness of the much more significant risk associated with holding cash over the long term. I would strongly recommend you do read up on investing for this reason. It shouldn't take long to build sufficient understanding to make a start.

I'd recommend turning to the Monevator website first of all, starting with:
https://monevator.com/investing-for-beginners-why-do-we-invest/
and other articles in the same series (work up from the bottom):
https://monevator.com/tag/investing-lessons/
some more about returns and inflation:
https://monevator.com/volatility-inflation-and-asset-class-returns/
and also some guidance on how to go about investing: https://monevator.com/category/investing/passive-investing-investing/

The book Smarter Investing by Tim Hale (as mentioned above) is a great choice if you want some more background information and detail.

snowqueen555

Considering moving my cash LISA from Skipton to Moneybox, anyone else doing the same? I want to wait until my 1% comes in from Skipton though ,the moneybox figure is only a variable rate, there is no guaranteed period of 1.4%

Annoyingly Hargeaves Lansdown charged me £75 to move my Lisa out, which is a fee they stopped the month after I transferred out.

kiwi_fruit

masonic wrote: »

Hopefully, I've been able to raise your awareness of the much more significant risk associated with holding cash over the long term.

Yes, I realise I need to tone down my knee-jerk reaction towards investments and think logically. I don't think I could ever change my "risk appetite", or more like lack of it, but cash LISA really doesn't seem like such a good idea after all. I very much appreciate the detailed response you've given and your time doing it.
So in a nutshell you'd recommend S&S LISA, split between bonds and equities?

masonic

kiwi_fruit wrote: »

So in a nutshell you'd recommend S&S LISA, split between bonds and equities?

Yes, and you'll see from some of the reading above that there are ready made "multi-asset" investment funds available that you can invest in and then leave alone. There are even those with a "target retirement" date that will automatically move you into lower risk assets as you approach retirement if, for example you wanted to access the money at a specific time (for example to buy an annuity). A single fund, provided it invests across the major world stockmarket indexes, is quite sufficient and tends to be the approach taken in many people's pensions these days.

Certain providers, such as Moneybox, will take you through a questionnaire and choose investments of appropriate risk for you, although I don't generally suggest doing that as you'll end up paying higher charges for the lifetime of your investment, and the impact of higher charges over such a long period can be significant.

JimboW

So we know that you can’t open any LISA once you’ve turned 40 years old. But you can continue to contribute up to £4K a year and continue to receive the government bonus until you’re 50. But the question is between 40-49 and I suppose 50+ are you allowed to transfer to get a better rate? This isn’t clarified on Gov.uk or MSE. Can anyone shed any light?

Ghostcrawler

you need to open before you turn 40, can make any changes until you turn 50 and after 50 it remains invested or can move to cash on hold if you have LISA S&S a/c but not allowed to add any new money/deposit in any LISA a/c. But if you have LISA S&S a/c, funds can be sold or bought from the cash/balance but remember no new money, you can just play with your accumulated money. I got this confirmed from HL with whom I have LISA S&S a/c.

masonic

As Ghostcrawler says...

At 40, if you don't have one, you can't open one
At 50, you can't put any more new money in
At 60, you can withdraw, close it, transfer it to a different type of ISA penalty free

LISA to LISA transfers can be done at any time, subject to there being providers willing to accept transfers. Switching investments within a S&S LISA can also be done at any time.

oli356

I'm 25 years old and have £10,600 in a Natwest Help to Buy ISA. I do not see myself buying a house within the next couple of years, I don't know when it will happen. I am putting in £200/month and therefore I will have £12k in the HTB in several months time which will give me the max bonus of £3k.

In my area it is next to impossible to get a house for <£250k and therefore the bonus with the HTB would actually be £0 as I wouldn't be eligible.

Whilst it would take 3 years (putting in 4k a year) into a LISA to get up to the same theoretical bonus as I currently have on HTB, the LISA on year 1 would give me a £1k bonus as it is possible to buy a house for <£450k. Therefore it seems like a no brainer to open an LISA to get the bonus.

What I'm unsure of is the transferring from HTB to LISA. I can transfer £4k on year 1 which I believe would impact my LISA allowance but not the general (£20k) ISA allowance. However what do I do then do with the money in the HTB? Do I leave it and then am I able to transfer £4k out next year and the year after that? Whilst getting the HTB 2.5% AER in the mean time? Does it make sense to keep adding in £200 a month to the HTB as the rate at 2.5% is quite good?

Any advice appreciated please.

Jibeddy

How have people who have transferred from Skipton to Moneybox been getting on? I had a nightmare switching from Nutmeg to Skipton a couple of years back where the government bonus was not being paid and I was having to to call them constantly to resolve (took 3-4 months roughly). Main questions are how long did it take? Have you had any trouble with bonuses being paid after the transfer? Any other things to be aware of?

It put me off transferring my LISA after the experience but I'm ready to bite the bullet again if the transferring process has improved now.

grumiofoundation

Jibeddy wrote: »

How have people who have transferred from Skipton to Moneybox been getting on? I had a nightmare switching from Nutmeg to Skipton a couple of years back where the government bonus was not being paid and I was having to to call them constantly to resolve (took 3-4 months roughly). Main questions are how long did it take? Have you had any trouble with bonuses being paid after the transfer? Any other things to be aware of?

It put me off transferring my LISA after the experience but I'm ready to bite the bullet again if the transferring process has improved now.

Transferred Skipton -> Moneybox earlier this year. Transfer was fine no problems. Had already contributed and had bonus paid before transfer so can’t comment on that. Only (slight) wrinkle I seem to remember was having to set up a direct debit for (£10?) which I then had to later alter to £0.