Who would like a tax-free birthday present of £250,000, for free?
Me please, whats the catch? How much is it going to cost?
The cost to you, my friend? – Zilch, Nada, Zippo, Zero, Nothing!
This is a scam, right?
So what gives?
The UK government has given a generous tax break that gives you free money when you contribute to a certain type of investment account.
Oh, you’re talking about pensions, right?
No, in addition to tax relief in a pension, you can get tax relief in another savings vehicle.
What’s that, then?
It’s called a LISA (Lifetime ISA.)
Oh, I’ve heard of them, and I can’t see any advantage over investing in an ordinary ISA.
I didn’t think so either, until I started looking at LISAs in a bit more depth, and running some numbers.
But doesn’t it tie your money up? Whereas in an ordinary ISA you can access it at any time?
Yes, that is correct. But you can use it if you are a first-time buyer for a house deposit, or you can withdraw it in full, tax-free when you are 60.
So, why would I bother then?
Because for every £4000/year you contribute, the government will top it up with a 25% bonus to £5000. Not a bad investment return.
So, how do I get my free £250,000 then?
First, we assume that you have £4000 per year available to invest, and the money you put in a LISA would have been invested anyway and that you make the maximum contribution of £4000/yr. This can be by regular contributions or by a lump sum.
Ok, and how long do I have to make these contributions for?
To get the full amount of free money you will have to contribute £4000 per year, from when you can open a LISA at the age of 18, to the age of 50, after which no further contribution can be made. A total £132,000 worth of contributions over 33 years.
What happens then?
You wait a further ten years until you are 60, and voila, you can withdraw a total of £1,250,000, tax-free! Happy days.
Hang on, I thought you said £250,000, isn’t that a typo?
No! The total value of the LISA is £1,250,000 (£1.25 million!). The “free” £250,000 is the extra value as compared to an ordinary ISA would be if the same contributions were invested for the same period.
Happy 60th Birthday!
Oh, great, thanks. Wait a minute. how did you work those figures out?
I worked it out using a very good compound interest calculator on the excellent Monevator website here.
Firstly I calculated what the value of investing £4000/yr in a S&S ISA for 33 years at assumed 7% growth per year would be. This came to £509,035. Then, this is left for a further 10 years, giving a total of £1,001,349. The equivalent calculation in a LISA gave a total of £1,251,687. A difference of £250,338 for the exact same contributions.
Wow, that sounds great. Are there any further downsides?
There are further things to consider that may have to be taken into account before investing in LISA’s that I will explore in my next post. These include exploring the mix of investments to use, as already explored by youngfiguy here. Also maybe looking at how investing in a LISA at different ages compares, and potential funding gaps between FI and being able to draw on the LISA.
What do you think?
Has reading this post made you consider/reconsider LISAs, or do you think they’re a waste of time?
Does my maths add up? Weenie? 🙂
As always, comments, critical or otherwise, are gladly accepted.