Our product manager for the Lifetime ISA, Josh Queen, spoke to CityAM in defence of the Lifetime ISA: The new savings vehicle has garnered controversy but maybe a useful tool for first-time buyers. Hear what he has to say.
When the government first floated the concept of the Lifetime ISA in 2016, the reaction from the savings and investment industry was mixed.
Many felt that a vehicle combining such different aims as home-buying and retirement saving would confuse consumers, and that the Lifetime ISA’s similarity to a pension could undermine the excellent progress made on auto-enrolment. It’s fair to say that the Lifetime ISA, or LISA, has garnered its fair share of controversy.
For whatever reason – perhaps it was this controversy, or perhaps it was the very short timeframe between government announcement and launch day on 6 April 2017 – there has been a remarkable lack of interest from banks, building societies and investment managers.
For myself and the team at Nutmeg, however, the decision to offer this product was easily made. As an online investment manager with a focus on technology, our customers are slightly younger, aged 40 on average, and many are planning to buy their first home. For all the controversy, when we spoke with our customers we found them to be overwhelmingly positive about the Lifetime ISA, and importantly the response focused on the LISA’s deposit-building potential.
The benefits of the LISA
The benefits of the LISA go far beyond those of its older sibling, the Help to Buy ISA. The 25% bonus on contributions remains the same, but the £200 monthly restriction on what you can pay in is gone. Meanwhile, the overall allowance has risen to £4,000. Perhaps the real kicker is that the government top-up is actually paid into the account, so over time individuals can benefit from compound investment returns or interest.
Read more: What is the Lifetime ISA?
Aside from my professional interest in the Lifetime ISA, I am a supporter of the concept from a personal perspective. Being in my mid-20s and yet to place so much as my little toe onto the housing ladder, the LISA offers a real boost to my savings prospects.
Like many 20-somethings, I’ve had cash languishing in a Help to Buy ISA with an interest rate dropping every six months or so. I kept up contributions, but knowing it would take years to build a reasonable deposit. The LISA is a way to help me save. Happy in the knowledge that Nutmeg was one of only three firms offering it, I opened a LISA on the morning of 6 April 2017.
The (limited) downsides
Of course, the product has its drawbacks. You can only open one if you’re aged between 18 and 39, and will stop receiving the government bonus after you turn 50.
On the house purchase side of things, there’s an upper limit of £450,000 on the value of the property that can be bought with LISA funds. But the “£450,000 doesn’t get you a garden shed in London” argument should, in my view, be taken with a pinch of salt. A quick search on Rightmove turns up no fewer than 9,000 homes under the threshold and within the bounds of Greater London – and no, that’s not counting parking spaces or even shared ownership deals.
Of course, the proportion of these properties appearing in boroughs such as Westminster, Chelsea or Fulham is going to be low – but if you’re a first time buyer with aspirations to buy in those areas of London, you probably don’t need a government top-up in the first place.
On the retirement side, the argument is more nuanced. As a pension enhancer, the LISA is generally more useful to higher rate taxpayers who have maxed out their pension contributions for the year. Generally, a good rule of thumb, whatever your situation, is that if you’re saving for retirement you should fill your pension first, and then look to a LISA to boost your savings if you have investable cash left over. The LISA shouldn’t be considered a pension alternative.
We took the decision to launch the LISA because, first and foremost, we could see the real value it offered those looking for that extra leg-up onto the housing ladder. We’re taking every precaution to make sure our customers understand the product before they invest. I’m proud that we are able to help customers in this way, and I’m also proud that our team managed to turn around such a huge development so quickly.
The LISA is never going to be for everyone. That fact is baked into the very rules that govern it – and these rules, which are the most complicated Isa rules yet, should be read carefully by anybody planning to invest in a LISA. But we should remember that the LISA can be a very powerful tool to help individuals reach their savings goals more quickly, and make the challenge of buying a first home easier for so many.
[First published by City AM, 18 April 2017]
As with all investing, your capital is at risk. Tax rules may change in the future. ISA rules apply.
A Lifetime ISA may not be right for everyone. You must be 18–39 years old to open a Lifetime ISA. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000, or a terminal illness, you’ll pay a 25% government penalty (the withdrawal penalty will be temporarily reduced from 25% to 20% from 6 March 2020 till 5 April 2021 due to coronavirus). So you may get back less than you put in.
Compared to a pension, the Lifetime ISA is treated differently for tax purposes. So you may be better off contributing to a pension.
If you choose to opt out, or are not enrolling into your workplace , to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions
Any future means tested benefits may also be affected.
If you are unsure if a Lifetime ISA is the right choice for you, please seek independent financial advice.