Why the UK lifetime ISA is no good
Outlining the new lifetime ISA
The government is launching a new savings scheme on 1 April 2017 as announced at the previous budget. Upon first hearing about it, it sounded extremely attractive. It's called the lifetime ISA or LISA (pronounced Lie - Sa) for short.
The idea is that if you are between the age of 18-50 you can put up to £4,000 per year into a savings account with this LISA wrapper via your bank. You can then either access the money in order to purchase a property or will gain access at the age of 60. If either of those conditions are met then the government will top up the pot by 25% of your total contributions. Sounds like free money so in principle sounds like a good deal. On top of all this, the wrapper is like any other ISA wrapper in that any gains or interest earned are tax free.
In theory you can access your savings at any time however in order to qualify for the additional 25% government top up you shouldn't access the money until 60 unless you're using it to buy a first property. The point of the lifetime ISA is for the government to encourage people to save in order that individuals can start to make some progress in home ownership or their pensions. These are nice ideas in principle but is the product as generous as it sounds?
Is it worth putting money into the lifetime ISA?
The only way to truly determine wether the LISA is worth taking up is to assess the true rate of return or interest earned over the period of ownership. Let us assume that you want to get maximum benefit from the lifetime ISA and so you start to save the maximum £4,000 per annum each year and every year until you can access the money at 60. The lifetime ISA is like any other investment product. You invest money and earn a return. In this case the return is 25% on your investment of £4,000 every year for 33 years but the return is only earned in year 33.
Analysing this as a standalone investment ans ignoring the interest earned from the actual savings account we should view it as a total investment of £132,000. What's the return on this investment? You might be thinking - well it must be 25% so it's £33,000 i.e. the return is the money provided by the government at the end of the scheme.
Unfortunately, this isn't the case. You have ignored the time factor. The return is not earned until after you have reached the age of 60. There is an opportunity cost for keeping your money invested for that length of time. You could have invested your money else where during that time period. The question is what interest would you have to have earned each year over that same time period in order to achieve a growth of £33,000 at the end of the time period if you were investing £4,000 per year?
It turns out that that if you calculate the effective return over that time period, that is the annual return compounded each year, it works out that the lifetime ISA offers a 0.5% return per annum.
Should I use a LISA?
Given that the LISA offers a pretty poor return for tying your money up for such a long period I would recommend steering well clear of it. For a measly 0.5% annual return I would rather have the flexibility to access my money whenever I wish or I could put my money directly into a pension earning the tax relief and my Company matching scheme.
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