Nutmeg LISA

SavingStudent1

Hi everyone,

I was just reading upon Nutmeg's stocks and shares LISA and I am really interested by it, however - of course, it is risky and you could lose money. So, I am actually contemplating whether to really open it.

Has anyone been through a process of having a stocks and shares LISA (lifetime ISA) and then transferring it to a cash LISA? If so, how has the experience been and is it relatively simple to do with no complications / high costs?

Because, essentially, I want to open a Nutmeg S&S LISA for about 5 years, and then I want to transfer it to a cash LISA. I will plan to invest the maximum £4000 into it yearly, so after 5 years, I'll have £25000 total contribution (including the governments free bonus of £1k a year) and then by then, regardless of my LISA's value, whether higher or lower than £25000, I want to transfer to a cash LISA.

Maybe, I can feel to keep it for slightly longer, depending on my circumstances in the future - I am thinking a minimum of 5 years and a maximum of 7, simply because after that, the pot may become large and it can be too risky for me for example, if it is worth £25000 and it goes down by 10%, I'll lose £2500, which is too much than if I started off with £5000 and lost 10% which is not as difficult to absorb.

It is more because the LISA will be contributing to me buying a house, hence why - I will be keeping stocks and shares ISA for the long term e.g. with Vanguard or HL, but not in LISA format for too long, as described above.

Thank you!

Alexland

Nutmeg are OK but my concern would be that with current elevated stock and bond market valuations you stand a material chance of getting a negative return whatever S&S risk level you select after only 5 years. Anyone making new investments now should ideally be thinking longer term. We usually say at least 5-7 years but given the background of rising interest rates affecting asset prices maybe 10+ years. Is the £450k LISA property price cap likely to be an issue by the time you are ready to purchase?

SavingStudent1

Alexland said:

Nutmeg are OK but my concern would be that with current elevated stock and bond market valuations you stand a material chance of getting a negative return whatever S&S risk level you select after only 5 years. Anyone making new investments now should ideally be thinking longer term. We usually say at least 5-7 years but given the background of rising interest rates affecting asset prices maybe 10+ years. Is the £450k LISA property price cap likely to be an issue by the time you are ready to purchase?

Thank you! That makes sense, it is more that I am not too comfortable with playing with money that I am specifically putting towards buying a house. No, the property price cap wouldn't be an issue because most likely, I'll end up buying the house if lucky, 10 years or more from and I won't be able to afford something higher than the cap - at least for my first house.

I am not planning to use the Help to Buy Equity scheme - for newly built homes, instead buy a general home using the LISA.

My concern is mostly just this, for example:

After 7 years, I have contributed £35,000 i.e. full allowance + govt. bonus, and for simplicity, my fund is exactly at that value. Then, if it goes down by 10%, it'll be at £31,500 which will be annoying because:
1. If I don't contribute at all, to get back to £35k, I'll need a 11.11% increase, higher than the decrease.
2. If I put in another £5,000, it'll be £36,500, I'll need a 9.59% increase to get to £40k which is just level of my initial contributions, and make no loss.

Of course, for point 2, not exactly 9.59% unless I put a lump sum, even then as the govt. bonus is monthly, but I hope you get what I mean!

I have made a quite brave assumption that it will give me no returns over 7 years, but that was just for calculation purposes. In reality, it may have been at value £40,000 at the end of year 7, who knows? But, the point of ''It is more than the higher my pot grows, it becomes more difficult for me to recover any losses.' kind of hurts here as this money is towards a home!

gtat

But where else would you put that money? It is guaranteed to lose value as cash due to inflation. At least with a LISA you get the Government bonus. In your example, after 7 years you've only contributed £28k, so even if the £35k dropped by 10% you are still £3.5k up.

george4064

If you’re worried then remove the uncertainty and use a Cash LISA instead from the start, at least you’ll be able to sleep easy at night not worrying if the market is going to drop.

grumiofoundation

SavingStudent1 said:

Alexland said:

Nutmeg are OK but my concern would be that with current elevated stock and bond market valuations you stand a material chance of getting a negative return whatever S&S risk level you select after only 5 years. Anyone making new investments now should ideally be thinking longer term. We usually say at least 5-7 years but given the background of rising interest rates affecting asset prices maybe 10+ years. Is the £450k LISA property price cap likely to be an issue by the time you are ready to purchase?

Thank you! That makes sense, it is more that I am not too comfortable with playing with money that I am specifically putting towards buying a house. No, the property price cap wouldn't be an issue because most likely, I'll end up buying the house if lucky, 10 years or more from and I won't be able to afford something higher than the cap - at least for my first house.

I am not planning to use the Help to Buy Equity scheme - for newly built homes, instead buy a general home using the LISA.

My concern is mostly just this, for example:

After 7 years, I have contributed £35,000 i.e. full allowance + govt. bonus, and for simplicity, my fund is exactly at that value. Then, if it goes down by 10%, it'll be at £31,500 which will be annoying because:
1. If I don't contribute at all, to get back to £35k, I'll need a 11.11% increase, higher than the decrease.
2. If I put in another £5,000, it'll be £36,500, I'll need a 9.59% increase to get to £40k which is just level of my initial contributions, and make no loss.

Of course, for point 2, not exactly 9.59% unless I put a lump sum, even then as the govt. bonus is monthly, but I hope you get what I mean!

I have made a quite brave assumption that it will give me no returns over 7 years, but that was just for calculation purposes. In reality, it may have been at value £40,000 at the end of year 7, who knows? But, the point of ''It is more than the higher my pot grows, it becomes more difficult for me to recover any losses.' kind of hurts here as this money is towards a home!

I don't understand what you mean here? 

Assuming a drop of 30%

If your pot is worth 50k you lose 15k - so 35k remaining
If your pot is worth 40k you lose 12k - so 28k remaining

So yes you have lost more in the first example but the % drops are the same, so obviously you have more money left if you start with more.  

The actual numbers lost make no difference to the % growth needed for recovery - in both cases you need a 42.5% increase to get back to the value it was before it dropped 30.



As said above if you aren't willing to risk a drop in value you can use a cash LISA. 


 

SavingStudent1

gtat said:

But where else would you put that money? It is guaranteed to lose value as cash due to inflation. At least with a LISA you get the Government bonus. In your example, after 7 years you've only contributed £28k, so even if the £35k dropped by 10% you are still £3.5k up.

True, I don't really care about the inflation tbh lol. Although it is something I should factor, I just feel it is so high, it is hard to guarantee returns that sort of cover inflation over a short term because of the volatile nature of the market. Over the long term, if you can get 8% returns, you can feel comfortable to make 3% returns after inflation e.g. if it is around 5% each year.

Fair enough, that is true - it is more that I want to keep the govt. bonus too, so greedy lol! To be honest, aren't there some standard funds that usually have positive returns over 5 years? I know there is no guarantee, but you'd expect your return to be positive by the end of year 5?

SavingStudent1

george4064 said:

If you’re worried then remove the uncertainty and use a Cash LISA instead from the start, at least you’ll be able to sleep easy at night not worrying if the market is going to drop.

True say!

SavingStudent1

grumiofoundation said:

SavingStudent1 said:

Alexland said:

Nutmeg are OK but my concern would be that with current elevated stock and bond market valuations you stand a material chance of getting a negative return whatever S&S risk level you select after only 5 years. Anyone making new investments now should ideally be thinking longer term. We usually say at least 5-7 years but given the background of rising interest rates affecting asset prices maybe 10+ years. Is the £450k LISA property price cap likely to be an issue by the time you are ready to purchase?

Thank you! That makes sense, it is more that I am not too comfortable with playing with money that I am specifically putting towards buying a house. No, the property price cap wouldn't be an issue because most likely, I'll end up buying the house if lucky, 10 years or more from and I won't be able to afford something higher than the cap - at least for my first house.

I am not planning to use the Help to Buy Equity scheme - for newly built homes, instead buy a general home using the LISA.

My concern is mostly just this, for example:

After 7 years, I have contributed £35,000 i.e. full allowance + govt. bonus, and for simplicity, my fund is exactly at that value. Then, if it goes down by 10%, it'll be at £31,500 which will be annoying because:
1. If I don't contribute at all, to get back to £35k, I'll need a 11.11% increase, higher than the decrease.
2. If I put in another £5,000, it'll be £36,500, I'll need a 9.59% increase to get to £40k which is just level of my initial contributions, and make no loss.

Of course, for point 2, not exactly 9.59% unless I put a lump sum, even then as the govt. bonus is monthly, but I hope you get what I mean!

I have made a quite brave assumption that it will give me no returns over 7 years, but that was just for calculation purposes. In reality, it may have been at value £40,000 at the end of year 7, who knows? But, the point of ''It is more than the higher my pot grows, it becomes more difficult for me to recover any losses.' kind of hurts here as this money is towards a home!

I don't understand what you mean here? 

Assuming a drop of 30%

If your pot is worth 50k you lose 15k - so 35k remaining
If your pot is worth 40k you lose 12k - so 28k remaining

So yes you have lost more in the first example but the % drops are the same, so obviously you have more money left if you start with more.  

The actual numbers lost make no difference to the % growth needed for recovery - in both cases you need a 42.5% increase to get back to the value it was before it dropped 30.



As said above if you aren't willing to risk a drop in value you can use a cash LISA. 


 

Sorry, yes - I actually meant it in absolute terms, my mistake. I meant, a 30% drop is more if you start with 50k than 40k and a 42.5% increase is more if you start with 28k than 35k. But yes, I just realised - this doesn't make much of a difference, because the return on a stock is usually in % terms anyway, so a 42% return is what I'd see as the performance of the fund, and this would cover both cases to get back to recovery.

My mistake, this makes sense - I'd need the same increase but it is just probably knowing the absolute value of the decrease that scares me, knowing that I lost 15k instead of 12k sounds a lot more!

Alexland

SavingStudent1 said:
aren't there some standard funds that usually have positive returns over 5 years? I know there is no guarantee, but you'd expect your return to be positive by the end of year 5?

Generally yes but the problem is that most funds have done very well over the past 5 years and valuations of most investable assets are much higher relative to their income potential than the historic average.
In addition if investing regularly then it's only the money contributed at the start that is invested for 5 years so on average the money is only invested for 2.5 years and adverse market movements towards the end of the period could more than wipe out gains made on smaller amounts at the start.

SavingStudent1

Alexland said:

SavingStudent1 said:
aren't there some standard funds that usually have positive returns over 5 years? I know there is no guarantee, but you'd expect your return to be positive by the end of year 5?

Generally yes but the problem is that most funds have done very well over the past 5 years and valuations of most investable assets are much higher relative to their income potential than the historic average.
In addition if investing regularly then it's only the money contributed at the start that is invested for 5 years so on average the money is only invested for 2.5 years and adverse market movements towards the end of the period could more than wipe out gains made on smaller amounts at the start.

That is a fair point, thank you. And I just realised we can't exactly mitigate this as we would with a stocks and shares ISA, as the maximum lifetime ISA allowance annually is capped at £4000. By the way, in the same sense, if we invested in a S&S ISA (over 5 years too) instead, could we overcome this issue by:

If I want to invest a total of £20,000 over 5 years,

- In Year 1, invest £2,500 each quarter or £833.33 a month, either one
- In Years 2, 3, 4 and 5, invest £208.33 a month (£2,500 a year).

In this way, at least we invested a large amount at the start, so by the end of the 5 years, the gains made on the investment at the start of the period will be significant?