Vanguard LifeStrategy 40 for LISA - Good plan?

Octagon

Hello there,

I would like some opinions/advice please, if you’d be so kind.

I want to put £90 per month in a LISA, for 7 years, as of next month.

This is for the purposes of a shared ownership flat deposit, for which i’ll need about 10K.

I am a busy bee, so I have little time for doing much managing, or the learning required to do the managing.

I don’t want to take lots of risk, as I would like to be settled in my part owned flat by my late 30s, and I won’t be if I take too much risk, and it goes wrong.

I had initially thought Nutmeg, but it would be a big ole admin headache if they go bust (which it looks like isn’t beyond the realms of possibility).

My new thought is a Hargreaves Lansdown LISA, with all my contributions going into Vanguard LifeStrategy Conservative Growth Fund (the 40% equities one).

Is this a decent enough plan? Am I missing anything?

Many thanks!

O.

IanSt

Octagon wrote: »

Is this a decent enough plan? Am I missing anything?

A couple of things that you possibly might need to further consider:

In these atypical days it's no longer certain that bonds will rise should the stock market fall, so do you have other savings that you would have ready should your investment be worth less than the amount put in?

What yearly house price increase is the £10k deposit predicated on? I personally would like to see a housing price crash, but if they continued to increase at the rate they have, then would the £10k deposit be enough?

System

I think it should be relatively stable for those goals and period of time, there are no guarantees of course, but you needn't worry too much about house prices growing if your deposit (and hopefully affordability) is growing too.

Or you could get a nationwide flexdirect and regular saver for guaranteed 5%, slightly less than vls20 would give you but guaranteed - the only reason to bother with bonds in your situation is for Lisa tax bonus

dunstonh

Regular contributions typically need around 15 years to make them worthwhile. You can sometimes get away with 10 years.

7 years is very low for a regular. The first contribution has less than one economic cycle and the last contribution has less than 1 month. Only the first 2 years contributions will be there for more than 5 years.

So, it will be a risky option.

I had initially thought Nutmeg, but it would be a big ole admin headache if they go bust (which it looks like isn’t beyond the realms of possibility).

Their financials are a concern.

Octagon

Thank you for your replies everyone.

Re: House price rises, I know this is in that regard, a big stab in the dark plan. 280 to 300k shared ownership flats in London are available, and i’m just hoping they won’t get past 350K, or I won’t be able to do it. I need more than a 10% deposit on a quarter share, or I won’t pass the affordability tests (even with reasonably expected salary rises).

This is obviously me just taking a big chance, and hoping the savings plan works out, I earn enough in future, and flat prices don’t increase too much.

I expect I have a 50% chance of all this working out.

Thanks for the reassurance about the LISA/fund choice.

I understand what you mean about the risks, dunstonh. I guess it is a bit different, in that if I don’t manage my goal in 7 years (or up to 10 years tops), then the money will stay invested until i’m 60 (as per the LISA rules).

Is there a substantial chance that bond returns will tank at the same time as equities? That would be bad!

System

. Is there a substantial chance that bond returns will tank at the same time as equities? That would be bad!

If you're globally diversified as you would be with any of vls, you should be OK from things like the UK raising rates at least (something which affects both equities and bonds) - vls is far more exposed to the USA than UK, but the us has been raising rates for some time already. Corporate bonds would correlate to equities much more than gilts, which is why I prefer vls over some active funds ive seen that go more corporate to try to make up for their higher fees (ie Prudential range)

If you can be flexible about when you buy, and wait out a market cycle if necessary, you can go higher risk more safely, same with retirement - putting a clock on yourself restrains the risk you can afford. You can rent&invest, its not ideal but better than nothing

I'm not London's biggest fan (higher living costs & higher wages is less income tax efficient)
And I'm not big on shared ownership, its a foot on the ladder but rent and leases work against you, is it really necessary?

You could buy 100% of a freehold somewhere else, no rent, no lease extension, no dubious freeholders, possibility shorter commute if you can find work that is similar enough

SammenForLivet2

Appreciate the rates are low; but the amount your depositing each month is low - would it not just be easier (and safer given your concerns) to open up a Skipton Building Society Cash Online LISA; which pays above the BoE base rate?

Octagon

Oh good. That’s reassuring. Thank you Matthew.

London is very much my home, and I definitely won’t be leaving! I also don’t want children, so I won’t end up with not enough bedrooms. Security of tenure is what i’m after, and SO does provide that. It’s the best choice for my circumstances, although I understand there are issues with it.

I hesitate with the Skipton one, as it won’t keep up with inflation, and if I don’t manage my plan, it will sit in there, depreciating, until i’m 60. Even in 7 years, it would depreciate quite a lot.

I’ll give this a crack. If it doesn’t work out, i’ll go on a big holiday in retirement, instead! :-D

Octagon

P.S Matthew, I can stretch out to my 40th birthday, but after that, i’d be carrying a mortgage into retirement, which wouldn’t be ideal.

I guess I could even stretch it out to 45, since we’re all retiring at 70, apparently��

I shall have to think flexibly.

bowlhead99

Octagon wrote: »

This is obviously me just taking a big chance, and hoping the savings plan works out, I earn enough in future, and flat prices don’t increase too much.

I expect I have a 50% chance of all this working out.

To be honest, when something is going to take you 7 years and only have a 50:50 chance of success, it is not the sort of game most of us want to play.

For example, if investment losses have as much chance of hindering you as helping you, consider not using investment products at all (at least for your new money beyond the first couple of years, when the money will have five years or fewer in which to be deployed).

If the £90 a month might not be enough, do a larger amount, or increase it at a rate in excess of inflation as you get pay rises.

If your pay rises aren't enough, change your employer or field of work - your thirties aren't a time to get stuck in a rut in a dead end job, because you will feel even less like changing when you get to your late 30s / early 40s and are competing for roles against new graduates offering to work for peanuts and want to make your two decades of extra experience count; yet you'll still have a quarter-century to go before you can retire on state and personal pensions with a paid-off property.

I understand what you mean about the risks, dunstonh. I guess it is a bit different, in that if I don’t manage my goal in 7 years (or up to 10 years tops), then the money will stay invested until i’m 60 (as per the LISA rules).

You will always have choices. If you think you not going to manage your goal in the arbitrary deadline you set yourself, make it more likely to hit by changing the deadline or saving harder or reducing the short-term investment risk by not taking it.

If you don't want to have money locked up in a LISA with a penalty to get at it over the two decades that you might want it between ages 40 and 60, you don't need to put it into the LISA at all. The LISA limit is £4k a year, but you are proposing to put in only £90 a month (more like £1k a yeat). At that rate of saving there is no massive compelling reason to put it in this year's LISA, as you could build up your money outside a LISA and fit it into next year's allowance or the year after's instead. So, you can make the decision to lock into the LISA every two or three years instead rather than commit every month.

For example, you would probably not expect to get more than about 5% from a VLS40 product (obviously in the short term you might get +15% but you might also get -25%) and Skipton's cash LISA pays a little under 1%. While Nationwide's 'flexclusive' regular saver gives you 5%pa on monthly deposits of up to £250pm ; with instant access, and zero investment risk.

I hesitate with the Skipton one, as it won’t keep up with inflation

So, use Nationwide or others to pay you six or seven times as much interest, and put the larger maturing amounts into Skipton (or someone else's LISA product if there is a better one) in a few years down the road.

For example, in the twelve-month-and-one-day period between 5 April 2020 and 6 Apr 2021, you can put £12k of contributions into LISA allowances (because the £4k allowances for 2019/20, 20/21 and 21/22 are all accessible in that window) yet by Apr 2021 at £90pm you will have only mustered £3.5k total. With your tiny proposed contributions you are *well* within the reasonable limits that you would hit on the LISA. So, I see no reason to rush to use one this month, given you have only mentally given yourself a 50:50 chance of your plan working and if it doesn't work you will have a penalty to access the money within the next quarter-century from now before you hit age 60.

if I don’t manage my plan, it will sit in there, depreciating, until i’m 60. Even in 7 years, it would depreciate quite a lot

So, from those two sentences:
a) if you are concerned that money in a Skipton LISA would depreciate a lot against inflation over 7 years, don't use that low-rate product for 7 years. As suggested above, wait a few years (e.g. 2020, 2021 etc) before you decide whether to commit to a LISA. Perhaps by that point (when three years into your plan) you will have a clearer picture of how your salary and career and house prices are going.

b) if you did use Skipton to build your savings until age 40 and then decided to abandon your plan because for some reason you didn't want to buy a property at any point between then and age 60, so you were just going to keep the money locked up for another two decades instead to avoid the LISA access penalty... it wouldn't make any sense to keep it in a cash LISA product for that two decades. So you would just move it to an investment LISA product instead, once you had made that decision that it was going to be kept there for that long period. Where you choose to put your LISA funds for long term investment purposes after abandoning a property purchase idea (i.e., put it in an S&S LISA) is a completely different question to where should you put it for a deposit build (i.e. cash product).

c) If you do get to age 40 and abandon your property purchase plan having built up funds inside a LISA, and decide to use the funds for long term retirement instead, a cash LISA would be terrible idea, which we know from (b) above. So moving to S&S LISA is one option. But another would be that you could always just pay the penalty and get the funds back and stick them inside a pension if that is more lucrative at that point. For example, you might be earning more and on high rate tax in your 40s or 50s, and therefore decide you'll be better off getting that high tax relief instead of keeping the more modest LISA bonus you'd been given.

If you abandon the idea to buy property it will be important to have your investments work as hard for you as possible because you need to budget for paying rent from age 40 to perhaps 110 which is seventy years, and in most of those you will not be working. So, with a lofty retirement funding goal it is important to not make mistakes and pay unnecessary penalties in the first place. As such, take care about committing to a plan that has an access penalty. For the moment, for £90 a month, you don't need it, because you can just forget it and think about it again in 2020 when you have a more substantial sum.

Is there a substantial chance that bond returns will tank at the same time as equities? That would be bad!

Well if you look at the eight years from 2009 to 2017, bonds have given very positive returns at the same time as equities have given very positive returns. So, yes, bond returns can clearly move in the same direction as equities, and for a sustained period.

Would they 'tank' at the same time? If global equities 'tank' (drop 30%, 40%, 50% or even 60% over a year or two) then no you would not expect bonds to fall absolutely massively because people have to put their money in *something*.

However, if equities fall 40% and bonds only fall 10% (made up numbers), the bonds would certainly succeed in 'cushioning' the fall but in a £60 equity £40 bond fund, your £60 turns to £36 and your £40 turns to £36 so you only have £72 instead of £100, which is the sort of thing that can put a substantial dent in the savings you have accumulated at say, 4.5 years into your 7 year investing journey. Some people would think at that point, sod this for a game of soldiers I am going to get out of this investment malarkey and move it over to a cash LISA product to avoid further losses because I am hoping to buy in 2.5 years time and I have bitten off more than I can chew here.

So after abandoning ship aat year 4.5even if the markets did recover over the course of five years after a couple of years of flatlining, those people would no longer be investing and would miss the upside. Alternatively, they could hang around for the markets to flatline in a low trough for two or three years and then take five more years to recover. But by doing that (waiting 7.5 years after the first 4.5 years) they are twelve years down the line from today on what they had hoped would be a 7-year plan.

Octagon wrote: »

P.S Matthew, I can stretch out to my 40th birthday, but after that, i’d be carrying a mortgage into retirement, which wouldn’t be ideal.

If you mean state retirement age 68, that assumes you are going to get a 28 year mortgage. You could just get a 15, 20, or 25 year one.

Obviously a shorter term requires larger repayments. How do you know what repayments you can afford age 40 when you are sitting here in your early thirties? If you don't think your current job will pay enough to support a large mortgage or large repayments in ten years time, you have ten years to improve your career so it does. If we guess you started your career properly aged 21 and you are now 31 you are only half as far into your career as you would be by 41 so presumably plenty of time to obtain a more senior role, more specialist role, complete change of career etc.

London is very much my home, and I definitely won’t be leaving!

It is my home too, but by the time you get to mid 40s you will find lots of your friends will have moved around a bit - especially the ones that, unlike you, want kids etc and need to be able to afford all the cost which goes with that (nice schools or larger affordable properties etc etc). You can still get to London from commuter towns which are not as central as the shorter commutes. In a decade's time it might be even faster with faster rail links ; or remote working more prevalent requiring fewer days per week in a central office.

Some of those further-afield places are just as expensive as a mid-zone in London's transport network, but others not so.

I shall have to think flexibly.

That is the best advice you can give yourself.

System

Octagon -

.P.S Matthew, I can stretch out to my 40th birthday, but after that, i’d be carrying a mortgage into retirement, which wouldn’t be ideal.

I think its good to carry a mortgage as long as possible, into retirement if you can (if your pension satisfies the lender). Why I hear you ask?
1 - you can outperform the mortgage quite easily over such long times
2 - inflation will work in your favour - against your debt and boost your equities
3 - you'll be much more protected against "title deed theft" where someone steals your identity to sell your house underneath you
4 - you have more access to investments than you do to overpayments

I wouldn't rely too much on there even being a state pension by our age, it'll be means tested and insufficient at best, with a Lisa you could retire at 60, if you want to bring that to 57 (currently 55 but later for us), use a private pension/sipp (my employers scheme is fixed to state pension age, which I don't accept). If you want to retire before 57 you'll need a bog standard is a too, sacrificing bonus for access

I'm not much of a careers person though, but if you're not bogged down with a family, you're young and in London, now may be the time to focus on that, as with a higher income saving and borrowing will be easier. For me the severely expensive & time consuming commute has always meant working for graduate peanuts was unviable, so even though I am a graduate I do a better paid non graduate job locally