Put money in ISA before EOFY, hold onto cash or make the most of exchange rates?

TazCaz

I had been saving up to make my first contribution to my Lifetime ISA by the end of this financial year to make the most of the 25% government contribution, but given the current situation, I'm wondering if that's a good idea and whether I should perhaps hold onto cash instead.
Should I:
1. Deposit the full amount as planned
2. Split it between the ISA and keep the other half as cash/bank for easy access
3. Split it three ways - ISA, cash and exchanging some for AUD (note: I'm an Australian living in the UK who travels back to Australia regularly and the GBP to AUD rate is exceptionally good at the moment)
I am only able to get the government contribution for the next 8 years (until I am 50) and I know I won't be able to access the full amount until later in life, but figured it might be a nice later-in-life bonus, even if I do move back to Australia. I'm not currently signed up to any other pensions here in the UK, as I will likely plan to move home eventually and transferring pension to Australia before retirement age costs you 25% of your savings. I just figured the that at £4000 a year for the next 8 years, + 25% from the government, + interest would maybe make it worth keeping in the UK for the next 25 years?
I know I am in a very fortunate position to have little bit of extra cash at the moment, but I have been saving all year so just want to know what I should be doing with my savings!
Please be kind, I'm still fairly new to the UK.

TazCaz

Oops, just saw there was an ISA specific area but I don't think I can move this thread myself. Admin? Sorry!

Thrugelmir

Having been ribbed endlessly at the SCG by the locals as Gilchrist hit Flintoff and Anderson to all corners of the ground during a 50 over match. Not sure I've much sympathy for you.   

Pocket the bonus. The 25% is worth having. You will receive the money. Have no fear. 

PS You may need it for the increased cost of your airfare home. If the global airlines require financial bailouts. 

Alexland

Welcome to the UK, hope you settle in here, but it does seem a bit early to be making a 20ish year commitment to one of our slightly niche financial service products?

TazCaz said:

I am only able to get the government contribution for the next 8 years (until I am 50) 

Sorry I don't understand how you can be 50 in 8 years but are still under 40 to open the LISA account? You said this would be your first LISA contribution?

+ 25% from the government, + interest 

If you are making contributions into an account for 20ish years you don't want to be earning interest (as it will likely be below inflation eroding your spending power each year) but getting investment returns which will hopefully average out in the long term above inflation. This means S&S not a Cash account.

TazCaz

Alexland said:

TazCaz said:

I am only able to get the government contribution for the next 8 years (until I am 50) 

Sorry I don't understand how you can be 50 in 8 years but are still under 40 to open the LISA account? You said this would be your first LISA contribution?

Hi Alexland, sorry, should have made myself clearer. I opened the account a couple of years ago, just before I turned 40, with £1 - this would be my first proper deposit.

I'd also likely just make contributions for the next eight years while I can still get the 25% bonus, then leave it (as I'll likely be back in Australia by then). I'm not very wise on all things investments - hence why I'm on here! What did you mean by your last paragraph?

Alexland

TazCaz said:

Hi Alexland, sorry, should have made myself clearer. I opened the account a couple of years ago, just before I turned 40, with £1 - this would be my first proper deposit.

Aah OK that that makes more sense so by mentioning 'interest' does that mean you opened a Cash LISA which pays an ongoing interest rate of around 1%? These are intended for people buying their first home in the next 5 years.

The problem with saving in cash for long periods of time is that with inflation (the gradual increase in price of goods and services) running at around 2% you are essentially losing 1% of the spending power of your money each year. So over the next 18 years until age 60 most of your bonus will be used up on things you buy in retirement getting more expensive.

That's why pensions invest in Stock & Shares and there are S&S LISAs for people who want to invest for age 60. Sensible S&S investments are far more likely to beat inflation than cash savings. But the trade off for that likely enhanced return is that they are volatile and go up and down with the markets.

Also although ISAs have tax advantages for UK residents that may not be the case when you become an Australian resident again and there may be taxes that you pay in Australia for your overseas ISA account.

TazCaz

Alexland said:

TazCaz said:

Hi Alexland, sorry, should have made myself clearer. I opened the account a couple of years ago, just before I turned 40, with £1 - this would be my first proper deposit.

Aah OK that that makes more sense so by mentioning 'interest' does that mean you opened a Cash LISA which pays an ongoing interest rate of around 1%? These are intended for people buying their first home in the next 5 years.

The problem with saving in cash for long periods of time is that with inflation (the gradual increase in price of goods and services) running at around 2% you are essentially losing 1% of the spending power of your money each year. So over the next 18 years until age 60 most of your bonus will be used up on things you buy in retirement getting more expensive.

That's why pensions invest in Stock & Shares and there are S&S LISAs for people who want to invest for age 60. Sensible S&S investments are far more likely to beat inflation than cash savings. But the trade off for that likely enhanced return is that they are volatile and go up and down with the markets.

Also although ISAs have tax advantages for UK residents that may not be the case when you become an Australian resident again and there may be taxes that you pay in Australia for your overseas ISA account.

That's all very helpful, thanks Alexland. I've just gone in to check and it's a 'UK retirement savings (online cash lifetime ISA) with Skipton and indeed the interest rate is 1% (currently sitting at the grand total of £1.26! with my previous year's 25% bonus!). If I were to take advantage of the 25% government bonus for the next 8 years (let's say if I were able to put in the full £4000 maximum I am allowed, thus achieving £32,000 + £8000 government bonus + 1% over the next 18 years (a bit over £400), would that be worth it in terms of beating inflation? 

When I set it up, the effective 25% interest rate (at least until I was 50) looked good - and had to make a decision very quickly about opening one in time before I turned 40 (hence why I only committed the £1 to start with) - but I do need to make a decision about whether that's worth locking up my money in the UK for the next 18 years. I do think it's good to have some accessible cash on hand in an emergency and that might be even more necessary at the moment. It's just that the interest rates are so low here (and I do make the most of bank switches to get the bonuses, very MSE!) and I'm trying to keep the cash I have in Australia low as I own a property there and am currently losing 33% of any income or interest I make as I am currently living in the UK. My plan, if I used the savings I currently have to make the most of the GBP-AUD exchange rate would probably be to send to to Aus and have someone withdraw it (put it under the mattress so to speak!).

I know I'm in a fortunate decision to have a few extra pounds at the moment, when others are going through hardship, but I have been saving because, as I'm on a visa, I have no access to public funds for a few years until I'm granted indefinite leave to remain, so if I suddenly become unemployed, I'm eating into savings.

Anyway, I obviously also need to make a decision today, in order to make the payment by the end of the financial year.

What might you do in this case? Is there a happy medium of a great interest rate with access to cash? Haha I know, the holy grail.

Alexland

Yes with the initial 25% bonuses (this is not an ongoing interest rate) and the ongoing poor circa 1% interest rate together you might keep up with inflation (if it remains low and the interest rate doesn't decline as Skipton are offering new LISA customers only 0.35%) against the original contribution value over 18 years however even Skipton themselves have a bold warning about this misuse of their product on their website. When putting money aside for retirement you should ideally be using a S&S investment (via a LISA or pension depending on your circumstances) which is more likely to deliver a real return above inflation.

https://www.skipton.co.uk/savings/isas/cash-lifetime-isa

A Cash Lifetime ISA may not be the best option for retirement savings. It’s generally accepted that saving for retirement is a long term commitment and it could be better to invest in stocks and shares. However, this will depend on your personal circumstances, including your attitude to risk. You could invest in a pension or stocks and shares Lifetime ISA. Whilst the value of your investment is at risk and can fall as well as rise, it may be possible to receive a better return from a stocks and shares based product over the long term (more than 10 years) than you would from a savings account.

What would we do? We are using S&S LISAs for age 60 accepting the market volatility. But then we are also doing pensions and intend to stay in the UK so it's not really comparable.

Alex

TazCaz

Alexland said:

Yes with the initial 25% bonuses (this is not an ongoing interest rate) and the ongoing poor circa 1% interest rate together you might keep up with inflation (if it remains low and the interest rate doesn't decline as Skipton are offering new LISA customers only 0.35%) against the original contribution value over 18 years however even Skipton themselves have a bold warning about this misuse of their product on their website. When putting money aside for retirement you should ideally be using a S&S investment (via a LISA or pension depending on your circumstances) which is more likely to deliver a real return above inflation.

https://www.skipton.co.uk/savings/isas/cash-lifetime-isa

A Cash Lifetime ISA may not be the best option for retirement savings. It’s generally accepted that saving for retirement is a long term commitment and it could be better to invest in stocks and shares. However, this will depend on your personal circumstances, including your attitude to risk. You could invest in a pension or stocks and shares Lifetime ISA. Whilst the value of your investment is at risk and can fall as well as rise, it may be possible to receive a better return from a stocks and shares based product over the long term (more than 10 years) than you would from a savings account.

What would we do? We are using S&S LISAs for age 60 accepting the market volatility. But then we are also doing pensions and intend to stay in the UK so it's not really comparable.

Alex

Thanks again Alex. This will embarrassingly show my naivety but I didn't even know the S&S LISA was an option. When I spoke to Skipton just before setting it up and told them it would be for retirement, this is the one they directed me to. We don't have ISAs as such in Australia, so the concept was quite new to me. All I knew was that I had a very limited time to set one up. I guess they don't allow you to swap accounts?

I do have an account with Wealthify. There was a good deal to set one up on a cashback site I used. I'd never had one of these account before so I put in a few hundred pounds just to see how it would track - and it was actually going quite well until these past few weeks when, like everything else, it's taken a dive. I know savvy investors would say "now is the time to buy" - but I simply don't know enough about the stock market - I would prefer to just put my money in an account and let the experts do that (which is what Wealthify does I guess). I guess I have a medium risk aversion (overall I want to see the figure go up, but happy to take some hits along the way).

Perhaps I could consider sending the money to Australia and putting it in my pension there (called superannuation). Though again, I've lost a fair chunk of that in the past few weeks, so not sure now is the time to be doing that.

Alexland

TazCaz said:

I guess they don't allow you to swap accounts?

It is possible to transfer a Cash LISA into a S&S LISA however (1) the S&S LISA provider would need to accept inbound LISA transfers so not Hargreaves Lansdown and (2) you may find it difficult to open a S&S LISA now you are over 40 even though it should be allowed to receive the transfer of an existing LISA.