cash LISA + fund investment for retirement?

TheLittleSaver

Hi everyone,

to make it short to people who didn't read my previous thread, I am thinking about a way to make some decent money out of my savings overtime, until I will reach retirement age.

I'm in my mid-thirties and self employed (sole trader).

So, I'm thinking about these three options:

- Open a S&S LISA with AJBell, with one of their packages (I think either "income" or "adventurous"), although they say that once they set up the package, than it's up to me taking care of it... but at least I suppose I can leave it for 1-3 years as it is, while I will get some more knowledge that will allow me to actually take care of that investment properly (or change platform).
OR

- Open only a normal cash LISA for now, so at least I can get the bonus for this tax year, until I get some more experience later one, to then start investing (which means it would be good to use a platform that would allow me to both options, cash LISA and investment, like AJbell, unless you ar ethinking of a better option?).

OR

- Again, open a normal cash LISA and put £4000 into it to maximize the government help, plus a Vanguard LifeStrategy 60, into which I would put anything I can. So, every year I would give priority on filling up the LISA, to then  feeding the Vanguard package with the remaining of my yearly savings (always trying to keep a bit of cash as an emergency fund).

I think I'm leaning towards the choice No.3, as with the cash LISA you can only add £4000 per year maximum, so at least if I manage to save more money, I can do some investment on the side. What do you think?

Thanks

kinger101

My thoughts
(a) not clear why you want a cash LISA.  If it is for retirement, then cash isn't a suitable for long-term investment.  Inflation WILL erode it's value.  I'd only use cash LISA for property purchase.  But have 6 months expenditure in accessible cash (not LISA) for a rainy day.
(b) VLS 60 isn't a good choice for someone 20+ years from retirement.  The bond allocation will cause significant drag over a 2-3 of decades. I'd go 100% equities in a world index tracker for now and review again in 10 years.  Or VLS80/equivalent.
(c) If you pay higher rate tax, then a pension will be more tax-efficient than a LISA for retirement saving.   Though it's still worth opening a LISA with a token amount if you haven't already done so to give you more flexibility in the future.

barnstar2077

Can someone say what the penalties are like if you remove your money early from a LISA?  I know you have to pay a government early withdrawal charge of 25% (up from 20% from next year apparently), but how does it work in practice?  For instance, if you took some payments out but left the rest in until you are 60, could you then take the remainder without penalty?  Could a normal S&S ISA / SIPP combo be better if you needed some of the money earlier, or does the government bonus mean the LISA wins every time?  I am too old for a LISA so it isn't something I really looked into.

I am only asking because I think you are young enough to be able to plan a bit of flexibility into your strategy, just in case you need to cut down on hours / retire earlier than planned.  I have a friend in their late fifties who really struggles at work now due to arthritis, they would love to give up work and be able to rest when they want to.

TheLittleSaver

Thanks for your reply, kinger101.

(a) Oh, I thought that a cash LISA was a good way to save my money, while getting a £1000 boost each year from the Goverment? So you say that on the long run, this is not worth it?

(b) I see, Iit actually makes sense do risk more with a VL80, rather than 60, considering that I would have many years ahead to ride the bumps.

(c) I don't pay higher tax rate.

kinger101 said:

My thoughts
(a) not clear why you want a cash LISA.  If it is for retirement, then cash isn't a suitable for long-term investment.  Inflation WILL erode it's value.....
(c) ..... Though it's still worth opening a LISA with a token amount if you haven't already done so to give you more flexibility in the future.

you first say that it's not worth opening a cash LISA, then you say it's worth it to have more flexibility? Sorry I don't think I understood what you mean here.

eskbanker

barnstar2077 said:

Can someone say what the penalties are like if you remove your money early from a LISA?  I know you have to pay a government early withdrawal charge of 25% (up from 20% from next year apparently), but how does it work in practice?  For instance, if you took some payments out but left the rest in until you are 60, could you then take the remainder without penalty?

The penalty is only applied to the amount withdrawn, without affecting what's left in the account, so yes, in the example, the money withdrawn after 60 would be unpenalised.

MDMD

TheLittleSaver said:

Thanks for your reply, kinger101.

(a) Oh, I thought that a cash LISA was a good way to save my money, while getting a £1000 boost each year from the Goverment? So you say that on the long run, this is not worth it?

(b) I see, Iit actually makes sense do risk more with a VL80, rather than 60, considering that I would have many years ahead to ride the bumps.

(c) I don't pay higher tax rate.

kinger101 said:

My thoughts
(a) not clear why you want a cash LISA.  If it is for retirement, then cash isn't a suitable for long-term investment.  Inflation WILL erode it's value.....
(c) ..... Though it's still worth opening a LISA with a token amount if you haven't already done so to give you more flexibility in the future.

you first say that it's not worth opening a cash LISA, then you say it's worth it to have more flexibility? Sorry I don't think I understood what you mean here.

The point here is that if nothing else then you can open a cash one with £1 to get the clock ticking (mainly for the year you have to wait to use it for property purchase).

Otherwise pay into a S&S LISA as the value in a cash one will be eroded by inflation given the low rates of return.

Worth noting that unlike pensions and standard ISAs, although the rules permit you to transfer around to another provider, the transfer market is extremely limited for LISAs (e.g. HL won’t allow any LISA transfers, AJ Bell won’t permit a transfer if you are over 40, some platforms such as Fidelity don’t offer it at all).

kinger101

TheLittleSaver said:

Thanks for your reply, kinger101.

(a) Oh, I thought that a cash LISA was a good way to save my money, while getting a £1000 boost each year from the Goverment? So you say that on the long run, this is not worth it?

(b) I see, Iit actually makes sense do risk more with a VL80, rather than 60, considering that I would have many years ahead to ride the bumps.

(c) I don't pay higher tax rate.

kinger101 said:

My thoughts
(a) not clear why you want a cash LISA.  If it is for retirement, then cash isn't a suitable for long-term investment.  Inflation WILL erode it's value.....
(c) ..... Though it's still worth opening a LISA with a token amount if you haven't already done so to give you more flexibility in the future.

you first say that it's not worth opening a cash LISA, then you say it's worth it to have more flexibility? Sorry I don't think I understood what you mean here.

There are two types of LISA.  Cash and stocks and shares.  The bonus is available regardless.  The first question you need to ask yourself is how much cash you need to have, and how accessible it needs to be.  If you need it next week to buy a car, then it's no good sticking it in a LISA.  If you need it as a house deposit in five years, then cash LISA is very sensible.  If it is for retirement in 20-30 years, then cash is entirely unsuitable as it does not hold it's value (or increase in value over the long term).  

If it is for retirement, then you need to understand that it's not as efficient as a pension for higher-rate taxpayers.  If you put £1 into a LISA, that gets topped up to £1.25.  A 25% bonus.  The cost of putting £1.00 into a pension for a higher rate taxpayer is 60 pence.  This wlll be taxed in retirement (at about 15%)  so you get 85 pence back.  85/60 = 1.4167, i.e a 41.67% bonus instead of a 25% bonus.

The reason I say open LISA anyway, is once you've opened one, you're eligible to use them until you're 50 and for higher-rate taxpayers, legislation may alter to tip the balance in favour of LISAs.  And for basic-rate taxpayers who cannot benefit from salary sacrifice, they're much more tax-efficient than pensions (which can be as little as 6.25% bonus).

It would help people if you explained what you need money for (house/retirement) and whether you pay higher rate tax.

TheLittleSaver

kinger101 said:

It would help people if you explained what you need money for (house/retirement) and whether you pay higher rate tax.

Thanks kinger101 for the explanation, although I believe I have already explained my situation at the very beginning:

Mid-thirties, self employed, want to make to most out of my savings overtime for a better retirement, I don't pay higher tax.

So, from what I can understand, you are suggesting to ONLY have a Vanguard LifeStrategy 80, putting all my savings (minus some cash for emergency fund) into it?

Dh6

I’m in the exact same position as you, I have my LISA invested 100% in a global equities tracker. 

TheLittleSaver

Dh6 said:

I’m in the exact same position as you, I have my LISA invested 100% in a global equities tracker. 

Hi Dh6. Did you do that yourself, or through a package like the Vanguard ones? What platform are you using and why?

Great to have some feedback from someone on my exact situation!

Dh6

I’m using AJ bell and invested in HSBC all world tracker. I too wanted initially to hold it as cash and just use it to get the 25% bonus but it makes no sense if I’m going to hold it for another 27 years!