Confused about S&S LISA (Hargreaves Lansdown)

mediman

I'm looking to drip-feed invest about £30K into Vanguard LS 80/100 over the next few years, leaving £15K in cash. I'm 25 and make about £25K at the moment, which should rise steadily. My main goal is funding my children's education in 20 years, however I also want to buy a small property at some point - my partner and I are very flexible about when this happens. We're happy to rent in the meantime, but we're aiming to buy something in 5-10 years time. After doing calculations, we would indeed have enough in cash in 5 years to afford a deposit of £40,000 so I'm fairly sure I wouldn't need to dip into investments.

Of course, we also want to fully utilise government bonuses available. The way I see it there are 3 options:

Invest into a S&S ISA and continue contributing to the 4K currently saved in my Nationwide HTB ISA (pros: no penalty for withdrawals, cons: bonuses max out at 3K (quite soon), can't be used for mortgage deposit only exchange deposit, so won't offset mortgage).

Invest into S&S ISA and transfer HTB to Cash LISA (pros: no 3K bonus cap, bonus added regularly which accrues interest, can be used for mortgage deposit to offset mortgage, cons: effective 5% penalty for withdrawals, may be hard to max out LISA contributions while investing).

Invest into S&S LISA with Hargreaves Lansdown (pros: gov bonuses are also invested to maximise compounding, extra investment boost could help offset mortgage even more than option 2), cons: penalty for withdrawals, may have to ride out market lows before I can buy a property, HL have slightly higher fees than Vanguard S&S ISA).

Option 3) seems most appealing. However - let's say I were to open the HL S&S LISA, invest into it for say 10 years, then utilise less than the full balance for a house deposit (i.e. account stays open). I already have a solid pension so wouldn't need the S&S LISA for retirement purposes and the 5% government penalty makes liquidity an issue (would need liquidity to help with costs of raising children and other mid-life expenses). What I can't find an answer to is - could I after putting down the deposit, transfer the remaining S&S LISA balance to a regular S&S ISA without incurring the 5% government penalty?

Any help much appreciated. Please correct me if I've made any mistakes in my reasoning.

Thanks

eskbanker

mediman wrote: »

What I can't find an answer to is - could I after putting down the deposit, transfer the remaining S&S LISA balance to a regular S&S ISA without incurring the 5% government penalty?

The penalty is 25%, not 5%, and would apply to a transfer out to a non-LISA ISA (before age 60), as per https://www.gov.uk/guidance/lifetime-isas-for-isa-managers:

Investors can transfer their Lifetime ISA into a different type of ISA either with the same or another ISA manager but the Lifetime ISA manager must deduct the 25% withdrawal charge which applies before the balance is transferred.

mediman

Thanks very much, that's just the info I was after!
Sorry yes meant that it is an 'effective' 5% (ish) penalty because 25% penalty on your contributions + the 25% bonus is akin to 5 penalty.

So looks like things could get rather complicated if I mix investments with LISA. Maybe I'll stay away from this option..

DaisedAndConfusled

mediman wrote: »

Thanks very much, that's just the info I was after!
Sorry yes meant that it is an 'effective' 5% (ish) penalty because 25% penalty on your contributions + the 25% bonus is akin to 5 penalty.

So looks like things could get rather complicated if I mix investments with LISA. Maybe I'll stay away from this option..

Others may correct me but I believe you lose the government bonus on the cash AND pay the penalty for withdrawal against the qualifying terms.

bowlhead99

DaisedAndConfusled wrote: »

Others may correct me but I believe you lose the government bonus on the cash AND pay the penalty for withdrawal against the qualifying terms.

You have already had the government cash paid into your account in the month after you pay in to the LISA (eg your 80 already became 100 or your 1000 already became 1250).

So when you ask to withdraw 100 of gross cash or 1250 of gross cash, you'll pay a penalty of 25 on the 100, or 312.50 on the 1250, leaving you with £75 or £937.50 respectively. This is like losing 6.25% of what you contributed.

You can see the penalty as losing 25% of the assets you could have spent on a property or retirement, or you can see the penalty as taking all your bonus off you (and its growth) and then also losing 6.25% of your initial 'own' contributions and growth on the own contributions.

But it's not like you're losing the bonus *and* also losing 25% of what you'd put in. OP is right (other than the simplification of 6.25% to 5% as the effective penalty, which he knows is just an approximation)

kidmugsy

One answer, OP, is to use all the LISA money for the house deposit, thus avoiding the unwanted 6.25% penalty on the unused margin of the money. Or just accept that the unused money will fall tax-free into your hands at 60, in good time for you to help your youngsters with their early-adult expenditures, such as saving for a deposit on a mortgage, or buying personal transport for getting to work.

In your shoes I'd take the free money while it is on offer. Experience teaches that super wheezes like the opportunity to use a LISA don't last for ever.

mediman

kidmugsy wrote: »

One answer, OP, is to use all the LISA money for the house deposit, thus avoiding the unwanted 6.25% penalty on the unused margin of the money.

My issue with this is that it could be considered putting all one's eggs in one basket i.e. property. I don't want to overexpose myself to the UK housing market, which isn't the most reliable asset to have in one's portfolio. I would ideally like to retain some exposure to equity markets and leave at least some money in stocks and shares for decades to come. I suppose S&S LISA isn't the best vehicle for this.

kidmugsy wrote: »

Or just accept that the unused money will fall tax-free into your hands at 60.

But I'm not sure I can get through paying private tuition for secondary schools if the need for this arose. I want to be able to afford this if I deem it necessary.

poppy10_2

kidmugsy wrote: »

OOr just accept that the unused money will fall tax-free into your hands at 60

Inevitable that some government will change the rules on LISAs at some point in the next thirty five years before the OP turns 60. I wouldn't rely on the current guarantees. Take the money while you can and use it for the house deposit