Looking at the merits (and pitfalls) of new arrival 'Lisa'
HAVE you met Lisa? Lisa is new and just joined us this month.
“I am introducing a completely new flexible way for the next generation to save. It's called the Lifetime Isa.”
The immortal words of former Chancellor (and now former MP) George Osborne, introducing the Lifetime Isa, or ‘Lisa' in 2016. Now Lisa has arrived.
Since April 6, if you are 18 but not over 39, you have been able to open a Lisa. You can save up to £4,000 a year in your Lisa until you are 50, with the government topping up your savings by 25 per cent (if you save the full £4,000, government will top it up to £5,000). If you saved the current full allowance each year from 18-50, you would have earned the maximum government bonus of £32,000.
The show's over when you hit 50, though, and you must stop contributing to your Lisa.
You can also have the other types of Isa alongside Lisa: cash Isa, a stocks and shares Isa, or an Innovative Finance Isa. And the good news is that the bonus of up to £1,000 a year gained within your Lisa will not count towards your overall Isa savings allowance of £20,000.
So why did George Osborne add Lisa to the existing palette of Isa products?
The answer is that Lisa is the ‘double adaptor' in the Isa stable, designed for two specific purposes: to help first time home buyers, and to help those saving for when they turn 60.
You can use your savings to buy your first home in the UK, any home up to the value of £450,000, once your Lisa has been open for 12 months. If there are two of you, and you are both first time buyers - happy days! You can have a Lisa each.
The Lisa's second purpose is to save for later years, and you can withdraw the cash tax-free when you turn 60.
There is one exception to these rules: you can also draw out your savings without penalty if you are diagnosed as terminally ill.
Now let's look at the small print here. As we know, there's a reason why they print the small print small.
If you are forced to make an early cash withdrawal from your Lisa under other circumstances – for instance, if you lose your job or suddenly can't work for health reasons – there is a 25 per cent penalty to pay. This means a quarter of the whole value of your withdrawal, however, so not only is the government taking back the bonus it has paid you, but a little more as well.
It's the familiar financial health warning: you may get back less than you put in.
For instance, suppose in a year you save your maximum allowance of £4,000, qualifying for your £1,000 bonus.
Now there's an emergency, and you are forced to draw out the whole £5,000.
You will pay a withdrawal charge of 25 per cent of £5,000, which is £1,250. Having paid in £4,000 at the start, you only get £3,750 back. Ouch!
Your Lisa can hold any mixture of the conventional Isa investments: cash, bonds, shares and investment funds.
At this point, as a savvy saver, of course you consult your financial adviser. If you are saving for the short term, cash may be the best choice; if saving for the longer term, it may be worth looking at stocks and shares.
Now let's step back from the Lisa for a second, and look at the bigger picture.
What are the relative merits of the Lisa versus, say, the workplace pension?
Well, bear in mind that by 2019, if you are auto-enrolled into a workplace pension, your employer is bound to match your contributions of 3 per cent of your salary, and there is a government bonus on top of that, making total contributions for a basic rate taxpayer of 8 per cent.
It's not rocket science to see that your bonus here is over 100 per cent, and this is far more generous than the 25 per cent bonus available in the Lisa.
So why opt for the Lisa at all? Well, if you think that 8 per cent going into your workplace pension will provide you with the lifestyle you want in retirement, then fine.
However, if you wish to save more than 8 per cent per year, then Lisa, running alongside your pension, could be a welcome addition, and an extra government bonus, within your retirement plan.
:: Michael Kennedy is an independent financial adviser and pensions and investments specialist, and can be contacted on 028 71886005