Lifetime Isas: Another way to play the bank of Mum and Dad?

Last April saw the launch of the Lifetime Isa (Lisa) – the latest in the growing family of tax-free Isas – designed to help younger people save for a first home or for retirement. There has been promising take-up in the first few months: in August, Skipton building society revealed that 28,000 people had opened its cash version of the Lisa, while broker Hargreaves Lansdown says it has some 22,000 Lisa customers. But the Lisa has received a mixed reaction from the industry.

The Lisa has been criticised for diverting young savers’ attention and cash away from workplace pensions – where individual employee contributions are further boosted by contributions from employers. The harsh penalty fee for early access to Lisas has also been condemned. And the Lisa’s dual purpose has been described as both sensible and confusing.

To cap all that, just a few providers currently offer Lisa accounts, and there seems to be a growing consensus that the Lisa is most suitable for higher earners and well-off parents keen to help their children, rather than the 20- and 30-somethings it was supposed to target.

A Lisa can be opened by anyone aged 18-40. Up to £4,000 a year, topped up by the government by 25 per cent up to a maximum of £1,000, can be saved in a Lisa. The government’s top-up is paid annually for the first year and monthly thereafter. Contributions can then be made every year until an account holder turns 50, after which point any subsequent growth can only come from investment returns.

Stiff penalty

Someone who contributes the maximum of £4,000 every year from the age of 18 up to 50 (32 years) can therefore build up a maximum government bonus of £32,000. As with all other Isas, withdrawals are tax-free. But unlike a standard Isa, penalty-free withdrawals can only be made at the age of 60 or to buy a first property worth less than £450,000.

Anyone who wants to withdraw their money for another reason will forfeit any government bonus received, and interest or growth accrued on that money. A 5 per cent exit surcharge will also be made. ‘In effect, you are being penalised to the tune of 25 per cent of the value of your fund,’ says Jonathan Drysch, associate director at adviser Killik & Co. ‘This means anyone opening a Lisa should ensure they use any funds withdrawn either to buy a property or for retirement.’

Interestingly, 61 per cent of workers under 40 say they would open a Lisa, and importantly, more than two-thirds (68 per cent) of those potential savers would put money into a Lisa alongside a pension, according to a survey by pension consultant Hyman Robertson. This eases concerns that those who opt to use a Lisa as a retirement savings vehicle could lose out on valuable employer contributions.

Disappointingly, though, so far only a handful of potential Lisa providers currently offer one. Tanya Pein, an investment adviser at In2 Planning, explains that the new account was introduced at short notice, so ‘few providers were able to meet the launch date of April 2017, and even now, the range of providers is limited’.

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When the Lisa was launched, all the Lisas available were stocks and shares Lisas hosted by investment platforms, so investors who wanted to open a Lisa straightaway at the start of the tax year could only do so by investing in the stock market. And the fees could be steep (see table), particularly those of The Share Centre, although there is no administration fee. The firm offers a choice of its three multi-manager funds for a Lisa wrapper.

Provision mismatch

Other firms currently offering a stocks and shares version of the Lifetime Isa include Hargreaves Lansdown, Nutmeg and AJ Bell.

Hargreaves Lansdown offers a broad range of funds, investment trusts, ETFs, model portfolios, and UK and overseas shares – charges vary according to the type of investment selected. At Nutmeg customers can choose between a ‘fully managed’ portfolio – one regularly rebalanced by the management team – or a ‘fixed allocation’ portfolio of ETFs that is largely left to its own devices. Overall, charges come in at around 0.94 per cent and 0.62 per cent respectively, inclusive of fund fees. AJ Bell claims to have the cheapest Lisa at 0.25 per cent plus £1.50 dealing costs.

What about the cash alternative? Skipton Building Society is the only provider offering a cash Lisa, but it only pays meagre interest of 0.5 per cent. The dearth of options is disappointing, given recent research indicating that half of investors who have opened a Lisa have opted for the cash version.

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So how is the new account being used in practice? These are early days, but six months after the Lisa was launched, AJ Bell has published analysis showing that 46 per cent of its Lisa customers have not yet invested their money, preferring to hold it in cash. The research also reveals that its Lisa has been particularly popular with savers at the higher end of the age eligibility spectrum, with 45 per cent of customers aged 36-39. The average amount invested in an AJ Bell Lisa is £2,520.

Tom Selby, a senior analyst at AJ Bell, says: ‘New Lisa investors are clearly cautious of stock markets, which is understandable given their current level. This makes particular sense for first time buyers who may need access to their cash at short notice. The last thing a housebuyer needs is for the value of their investment to fall at the point they need it for a deposit.’ But, tellingly, he points out: ‘Many people are opening a Lisa as their 40th birthday approaches. This is a smart move, because once an account is open, they can benefit from the government bonus every year until they are 50 – but if they don’t apply before they are 40, those bonuses are lost forever.’

This latter statistic supports the view of many financial experts that the Lisa is mainly just another avenue for higher earners. Adam French, co-founder of robo-adviser Scalable Capital, says: ‘I am not entirely sure who the Lifetime Isa is for. My feeling is that it seems to be mainly offering very high earners another tax break.’

Tempting for top earners

Paul Waters, head of workplace savings at Hyman Robertson, backs French’s view. He calculates that a person who invests the maximum amount in a Lisa from age 18 until they are 50, assuming investment returns of 4 per cent per year (which is broadly in line with inflation plus 1.5 per cent), would accumulate £62,720 by the age of 30, £107,907 by the age of 40 and £173,589 by the time they were 60.

This leads him to conclude that a Lisa can be a useful vehicle for repaying a substantial part of a mortgage at the age of 60. ‘If most people are getting onto the housing ladder between the ages of 30 and 40 with a 25-year mortgage and if you have generous parents who could help you save from the age of 18, a Lisa is something to look at.’

Drysch agrees that the Lisa is mainly useful for higher earners – although he brings Junior Isa holders and higher earning self-employed people into the equation too. He argues that Lisas could be a valuable supplementary savings vehicle for higher earners, given the lifetime allowance (currently £1 million) limiting the value of pension payouts that can be made without triggering an extra tax charge, and the tapered annual allowance applied to pension contributions by those earning more than £150,000.

Drysch says: ‘Anyone who expects to breach the £1 million ceiling on their pension fund – perhaps successful young professionals in their 30s and 40s – may want to consider a Lisa to run alongside it. They won’t get higher-rate tax relief on contributions, but they will get the government bonus – and the Lisa will be excluded from the £1 million ceiling calculation.’

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Drysch adds that for Junior Isa holders who want to carry on saving flexibly beyond the age of 18, ‘perhaps with parental help’, the Lisa could be an attractive lifetime savings vehicle. But he cautions: ‘The restrictions on how the money can be subsequently used must be noted from the outset. For those who require full short-term flexibility on subsequent withdrawals, a standard Isa may be the better bet.’

For the self-employed who are saving towards retirement, a personal pension offers similar government support (basic-rate tax relief at 20 per cent) to a Lisa bonus; for higher-rate taxpayers, the additional tax relief available on a pension leaves it out in front. ‘However, anyone facing the possibility that they may breach the lifetime allowance may want to consider a Lisa for further contributions,’ suggests Drysch.

When the Lisa was announced, it was presented as a savings vehicle for younger people who have few assets and low incomes, and will struggle to get on the housing ladder compared with older generations. However, it seems that, as implemented, the new account fails to serve younger savers, due to its restrictions and harsh penalties, and the lack of products with low charges on the market. Instead, the Lisa seems to have shaped up as yet another tax-advantaged investment vehicle for those able to benefit from the Bank of Mum and Dad.

Pein concludes: ‘Perhaps a simpler system accessible to all savers – especially those on low incomes – would be fairer and more successful.’ 

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