April. Spring has sprung and with it brings the start of the new tax year. Workers get a £500 rise in their tax-free Personal Allowance and ISA savers see their annual allowance rise to £20,000.
But bubbling under the surface is a product that has been much-maligned in the press, by pension providers and even ex-Government ministers. The brainchild of Britain’s most notorious politician-cum-investment adviser-cum-editor-cum-corporate speaker, George Osborne, is now live. As a millennial in my 20s saving for my first house purchase, I have been closely monitoring what options are available both to me, and others in my position.
What is the Lifetime ISA?
All individuals aged between 18 and 40 are now able to open a LISA. The maximum annual investment into the LISA will be £4,000 plus the £1,000 government bonus – potentially payable until the investor is age 50. The maximum £4,000 LISA contribution will count towards the new overall ISA allowance of £20,000.
Investors can use their LISAs to buy their first home (subject to a maximum price of £450,000). It can also be used to save for retirement, with tax-free access from age 60. Money can be accessed at any time, although this incurs a 25% charge. This effectively cancels out the government bonus paid on that amount, and some. But wait just one minute – where can you get your hands on one?
Which providers are live with a LISA?
Hundreds of journalists and commentators have waded into the debate about who will come out top in this April’s biggest heavyweight match-up – no not Joshua vs. Klitschko, the LISA vs. the pension – so I’m going to steer well clear of that and instead look at with which providers you can now take out a LISA with and what it’s going to cost you.
Hargreaves Lansdown, The Share Centre and Nutmeg all had a LISA locked and loaded and as of yesterday you can open one with any of the three. AJ Bell and Fidelity have both indicated plans to launch and Skipton Building Society will offer one in June. Curiously one other provider, everyone’s favourite savings and investment service for police service personnel and spouses – Metfriendly, has also launched. But I’m going to ignore them as most people are neither a police officer, nor married to one. It’s surprising that banks haven’t entered the fray given their enthusiasm for the Help to Buy ISA. Providers weren’t helped by the FCA publishing their final consultation on promotion and distribution at the end of January this year.
Over in adviser platform land, Transact has launched on their platform, and it will be interesting to see the traction it gains from advised clients and their families. This will be one avenue to facilitate intergenerational wealth planning and allow younger family members to benefit from family linking on accounts. However, HM Treasury has confirmed that LISA funds cannot be used to pay for advice without incurring the 25% exit penalty, potentially posing a barrier to advice.
What’s it going to cost?
Hargreaves Lansdown has offered up its entire investment platter to LISA investors and is using its existing tried and tested charging structure. That’s 0.45% (plus any fund management/dealing charges) on the first £250,000 worth of assets.
The Share Centre has taken a different approach and you can only invest in any combination of three Share Centre managed funds (via Sharefunds) catering to different risk appetites. All admin fees, dealing commissions and initial charges are waived within the LISA and instead you are only charged the fund OCF (ranging from 1.99% to 2.21%).
Nutmeg has introduced the LISA as an additional wrapper to their existing ISA and SIPP options. You can choose either their fully managed portfolio or fixed allocation portfolio options and will be invested into a basket of ETFs which is selected based on your responses to a risk-profiling questionnaire. That means either a 0.75% charge on the fully managed (0.94% all-in including ETF charges) or 0.45% charge on the fixed allocation (0.64% all-in).
Now for the investment scenario modelling
So, considering the above charges, where will your finances stand, assuming you contribute the maximum annual limit of £4,000 plus government bonuses, investment growth, and minus those dastardly platform/fund management fees?
On the assumption that you see annualised asset growth of 5% per year, a 10-year investment on Hargreaves Lansdown (assuming fund management charges of 0.55%) could see your £40,000 total investments grow into £62,000. Not too shabby. But what about if you were to instead stick it out for one of the banks to launch a cash LISA? Barclays currently offers the best Help to Buy ISA rate at 2.27% so let’s assume they also offer this on the LISA.
10 years’ worth of the maximum contribution will see you end up with a LISA pot worth £56,700. Obviously, the potential returns pale in comparison to what you might expect from risk-based investments, but a £16,700 bonus on a £40,000 cumulative investment is the stuff of dreams for any millennial trying to get themselves onto the housing ladder.
If the LISA doesn’t have a negative impact on young peoples’ participation in workplace pension schemes, then this could potentially have a large positive impact for a generation constantly parroted as ‘worse off than their parents’. It will hopefully help the age of the average first time buyer creep back below the 30 mark and drive millennials away from ‘generation rent’ to ‘generation intent’.