I'm told "you are doing it the wrong way around"

bowlhead99

eskbanker wrote: »

Not strictly true, because the 25% LISA bonus is only applied to contributions throughout the growth phase rather than a one-off bonus at the end, so the later bonuses won't have had the chance to achieve the same compounded growth.

Eskbanker, that's a misconception.

Every pound you put in, would get a 25% government bonus boost the same year you put that pound in (in practice, a months lag between when the principal starts growing and the bonus starts growing, but that is one month lag on cash which is deployed for (on average) a couple of hundred months, so it's inconsequential).

So for every £1 that would be placed in the account and starts growing in an S&S ISA, you would have £1.25 in the account and growing if it was a LISA instead.

So for example, OP is age 37 now and will do 14 years of contributions until he is age 50. This year, he gets £5000 in (which would only be £4000 if it was a normal ISA). Say he gets 4% growth on that over the next year, his £5000 turns into £5200. If it was only £4000 with no bonus it would turn into £4160.

Then he puts in the next year's £4000 cash and gets another £1000 bonus on the £4000 contribution so there is £5000 of new investments on top of the £5200, which is £10200. Over the year that follows, it grows another 4% to £10608. Whereas in the normal S&S ISA it would just be £4000 new money on top of £4160 leaving £8160, which would grow at 4% to £8486.

We can repeat again the next year. He adds £4k and £1k bonus to his Lisa and so now he has another £5000+the existing 10608 = 15608 of investment funds. They grow again at 4% to £16232. By comparison using a normal non-LISA, he'd be adding £4000 to his £8486 to be £12486, which would grow at the 4% to give him £12986.

If you keep checking as we go, you can see that 5200 is 25% greater than £4160, just as 10608 is 25% greater than 8486, and 16232 is 25% greater than £12986.

If you repeat ad nauseum, after his contribution age 50 plus another years growth, the LISA funds are valued at £95k while the non LISA would have only been worth £76k. The £95k is 25% greater than the £76k.

Going forward after that, there are no more contributions, so it's clear that if you are continuing to keep the money invested in the same things for a decade between, say, year 2031 and 2041, and you start 25% higher with a £95k pot instead of a £76k pot, you will end up 25% higher. E.g. - assuming the 4% annualised real terms growth continues, you'd get £140.8k in the LISA ; being 25% higher than the £112.6k you'd have got in a normal S&S ISA.

You could work out through with a spreadsheet or calculator and paper if you disbelieve it. The only simplification as mentioned is assuming the bonus arrives in real time rather than with a 1 month lag (e.g. £4000 arrives March, £1000 bonus arrives April).

A 1-month delay on the investment returns commencing for the £13-14k of free money versus the investment returns commencing on the principal deposits, is not a big amount in the context of a £140k ending pot. If the returns are only 4% a year and it's only a twelfth of a year's delay, then even if the £14k bonus grows to something like £30k with all the growth over the couple of decades, a twelfth of 4% of £30k is only £100, entirely immaterial in the context of £140k ending value.

HTH

eskbanker

OK, you win! I wasn't ascribing any significance to the trivial timing delay but was looking at it from the perspective that the later fixed-value bonuses would be proportionately smaller relative to the cumulative balance than the earlier ones, but yes, that doesn't negate the overall 25% variance.

As you were....