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The risks and rewards of Lisa

The FCA has beefed up its risk warnings on the Lifetime Isa
March 23, 2017

The lifetime individual savings account (Lisa) launches on 6 April and the regulator has issued warnings to savers, who risk losing out on employer pension contributions if they pay into the Lisa instead of a workplace pension.

The Lisa allows individuals aged between 18 and 40 to save up to £4,000 each year and receive a 25 per cent government bonus on contributions, if used to buy a first home or if the pot is untouched until age 60. If the money is withdrawn before age 60 for anything other than a property purchase, a 25 per cent exit charge will apply, although this charge does not apply in the 2017-18 tax year.

Critics argue that the nature of the Lisa, as both a retirement tool and first-time buyer boost, means consumers need to be warned about the risk of missing out on employer pension contributions. So the Financial Conduct Authority (FCA) has agreed to update the Lisa rules with risk warnings to reflect that hazard. In a policy update released on 7 March, the regulator said: "We acknowledge there may be circumstances where a retail client is saving into a personal pension plan to which their employer contributes, and that choosing to save into a Lisa in preference to such a scheme might cause that consumer to forfeit employer contributions to that scheme. Therefore, we have extended our suggested risk warning about the potential loss of employer contributions to include personal pension schemes."

The FCA also amended its final guidelines to flag up the impact of taking out a means-tested benefit on the Lisa.

Jon Greer, pensions expert at Old Mutual Wealth, says: "The FCA's decision to add additional risk warnings to the Lifetime Isa on losing employer contributions to personal pensions is a step in the right direction. However, the move also cements the fact that the Lisa is a muddled hybrid product that confuses the savings landscape and additional warnings can only do so much to make it clearer."

The combination of tax relief and employer contributions means that the workplace pension will nearly always be the best option for retirement savings when compared with a Lisa or self-invested personal pension (Sipp), according to AJ Bell. The broker says a 25-year-old on a salary of £20,000 could have a workplace pension worth £9,285 by age 30 by contributing just £800 per year themselves, compared with a pot worth £5,802 if invested in a Sipp or Lisa.

However anyone considering a house purchase could find their buying potential boosted by the Lisa, making it well worth considering.

 

The 2017-18 Lisa loophole

One of our readers recently wrote in with the following question: "I am 19 years old and currently have a Help to Buy Isa, and I am looking to invest in the Lisa. I would like to know if it would be possible to keep my Help to Buy Isa and contribute to both in the same year - a total of £6,400 across the two. If not, am I able to roll my Help to Buy Isa into the Lisa?"

Like a Lisa, the Help to Buy Isa was designed to help first-time buyers on to the property ladder and savers receive a 25 per cent government bonus on their contributions. But it is only available as a cash Isa and has a lower subscription limit - up to £3,400 in year one and £2,400 each year afterwards. The maximum bonus you can receive is lower too, at £3,000 on total savings of £12,000, compared with a potential bonus of up to £32,000 in the Lisa, assuming you contributed the maximum amount between 18 and 50 - the age at which you must stop making contributions.

The Lisa will also be open longer than the Help to Buy Isa, which is only open to new savers until 30 November 2019. And you can fund a Lisa, stocks-and-shares Isa, cash Isa and Innovative Finance Isa (IFIsa) within the same tax year, as long as you do not exceed the annual Isa allowance.

It is possible to fund both a Lisa and a Help to Buy Isa within the same tax year, but you can only use the bonus on one to fund your house purchase. That makes the Lisa arguably a better bet than the Help to Buy Isa because the amount you can pay into it is larger, as is the potential bonus. Your pot might also grow more substantially over time if you can invest in stocks and shares as well as cash.

Providers offering a stocks-and-shares Lisa from 6 April will include Hargreaves Lansdown, The Share Centre and Nutmeg, while AJ Bell is aiming to launch its Lisa later in April.

If you did choose to keep paying into both a Help to Buy Isa and Lisa, you would have no choice but to use the £3,000 bonus on the Help to Buy Isa to fund your house purchase or face losing it altogether. The Lisa is more flexible - if you do not end up buying a property you can keep the bonus if the money stays invested until age 60 - and the potential bonus is larger. You can also only receive the Help to Buy bonus when your house purchase is complete, meaning it cannot be used for a deposit, whereas the bonus on the Lisa can be used for that purpose.

Instead of funding both, you could transfer your Help to Buy Isa into a Lisa, and there is a very good reason to do this in the 2017-18 tax year. For one year only, individuals can transfer any money paid into a Help to Buy Isa before 6 April 2017 into a Lisa without affecting their Isa allowance for the tax year - and earn a bonus on the full amount. You could potentially transfer £4,200 from a Help to Buy Isa - the total amount you could have accrued since launch on 1 December 2015 - into a Lisa before the end of the 2017-18 tax year, and also pay in the full £4,000 Lisa allowance. That translates to a potential Lisa pot of £8,200 in 2017-18, attracting a bonus at year-end of £2,050.

The loophole applies to all Isa allowances you want to move. Tom Selby, senior analyst at AJ Bell, says: "While any new money saved into a Lisa will count towards the overall £20,000 yearly Isa allowance, money transferred across from previous years' Isa subscriptions won't. So an investor could shift up to £4,000 saved in Isas in previous years into their Lisa, receive the £1,000 government bonus and still contribute up to £20,000 into their stocks-and-shares Isa in 2017-18."

Patrick Connolly, certified financial planner at Chase de Vere, says the only scenario in which you should take out a Help to Buy Isa instead of a Lifetime Isa is if you intend to buy a house within the next 12 months. "You need to have had a Lisa open for 12 months before you are able to use the bonus, whereas with the Help to Buy Isa you just need to have saved £1,600," he says.

"But if your time horizon is longer term, you have a greater range of investment options within the Lisa, a bigger allowance and more flexibility. Funding a Lisa will count towards your annual Isa allowance, but that increases to £20,000 in the next tax year, which gives you scope to put any extra you have into a stocks-and-shares or cash Isa."

 

Retirement savings comparison

 LisaSippAuto-enrolment
Company contribution£0£0£600
Personal contribution£800£800£800
Government tax relief/bonus£200£200£200
Total invested per annum£1,000£1,000£1,600
Age and amount accrued   
30£5,802£5,802£9,283
35£13,207£13,207£21,131
40£22,657£22,657£36,252
50£50,113£50,113£80,182
55£69,761£69,761£111,617
60£94,836£94,836£151,738
65£126,840£126,840£202,944

Source: AJ Bell, assumes a starting age of 25, an annual growth rate of 5 per cent, an annual salary of £20,000 and an auto-enrolment rate of 3 per cent employer, 4 per cent personal, 1 per cent Government contributions (the minimum levels required post April 2019).

 

Lisa and Help to Buy Isa comparison

LisaHelp to Buy Isa 
How much can you save each year?£4,000£2,400 (£3,400 in the first year)
Can you invest lump sums?YesNo - monthly payments only (£200 maximum per month), although you can make one additional payment of £1,000 in the first month
What is the maximum bonus?£32,000£3,000
When do I receive the government bonus?Annually for 2017-18 tax year and monthly from 2018-19When you buy your first home
Can I earn interest on, or invest the government bonus?Yes. You can invest or earn interest on the government bonus as soon as it has been paid in to your LisaNo. The bonus is paid to your solicitor or conveyancer when you buy your first home
When can I use the money to buy a house?After 12 monthsAfter £1,600 has been saved
Who can open the account?Adults under 40First-time buyers aged over 16
What’s the maximum property value allowed? £450,000£250,000 (£450,000 in London)
Can I use the money other than to buy a house?Yes, you can also withdraw the money tax-free after age 60.Yes, but you will not qualify for the government bonus on any amounts you withdraw

Source: Hargreaves Lansdown