Are you being lied to?
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When thinking about the future, a solid pension and a decent house come to mind. It seems like a staple for the normal lifestyle procedure. Having your own gaff and a sustainable pension. Then the thoughts of financing such things come flooding in, you will tend towards the saving perspective. Especially for a mortgage downpayment.
Perusing the savings schemes available can be overwhelming. You will most likely be greeted with ISA options (Individual Savings Account).
An ISA allows you to save tax-free into a cash savings or investment account.
There is a multitude of ISAs to choose from:
- Cash ISA
- Stocks and Shares ISA (investment ISA)
- Lifetime ISA (LISA)
- Innovative Finance ISA
Lifetime ISA (LISA)
The LISA is a government-supported ISA account that enables you to receive a 25% bonus on the money put into the account — up to £1,000 a year. For every £4 put into the account, the government will supply an extra £1. This bonus is given every month, on which interest and investment will grow.
These following rules apply:
- You must be at least 18 but under 40 to start a Lifetime ISA.
- The maximum amount you can put in each tax year is £4,000.
- You can contribute to your Lifetime ISA until your 50th birthday.
- If you intend to purchase a house, you must be a first-time buyer, meaning you’ve never owned a property in the UK.
- The home you want to buy must cost £450,000 or less.
- Once you start a Lifetime ISA, you must keep it open for at least 12 months before you can use it towards a deposit for your first house.
- You need to use a conveyancer or solicitor to act on your behalf when making the purchase which will incur additional costs.
- Your house must be bought with a mortgage.
- The funds in your Lifetime ISA can only be withdrawn to purchase your first home or once you turn 60 (or in certain circumstances where you are terminally ill)– if you withdraw funds before or for any other reason, you’ll be charged 25% of the amount you withdraw.
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It is incredibly similar to the Help to Buy ISA. In which you are able to save £200 a month, the government adds an additional 25% up to £3000 when you make a downpayment for a mortgage (maximum of £12,000 can be within the ISA of which 25% is £3000) and it must be spent on properties under £250k outside of London and £450k within London. This ISA is no longer available as of November 2019. A major difference is that with the LISA, you can receive a bonus of up to £33,000 if you have saved a maximum of £4000 a year from the age of 18 every year up to cut-off age of 50.
What’s the catch?
Unlike instant cash ISAs, there is indeed a withdrawal charge. This withdrawal charge is of course 25% of the sum withdrawn.
The government website describes the following examples:
Assuming no growth, initial savings of £800 will earn a 25% government bonus of £200 and give you a pot of £1,000. If you wish to withdraw the entire pot, a 20% charge will apply to the full £1,000. You’ll have to pay a government withdrawal charge of £200. This will leave you with £800, which is the same as you originally paid in.
If you only wish to access some of your money, you’ll have to take the withdrawal charge into account when requesting funds. You’ll have to withdraw more than the amount you need, to cover your needs and the 20% withdrawal charge.
If you need enough cash to cover a £120 bill, you’ll have to withdraw more than you actually require. Withdrawing £150 means you pay a 20% withdrawal charge of £30, and receive £120 in cash to meet the bill.
From reading this you may think the only charge on the money you withdraw is the money that the government has added at the end of each month anyway — i.e. you won’t lose any of your own money. On April 6th 201, the 20% charge on withdrawals increases back up to its initial 25%. The current 20% charge may be to entice those to withdraw in the short term and spend to help the economy through this recession.
However, they do not directly state the money loss that will be incurred on your initial deposits. Which is 6.25%.
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Let me walk you through it
If we deposit £800, at the end of the month, the government gives an extra £200 (25% of our deposit) to total £1,000. If we want to withdraw this amount, the charge on the money we withdraw is 25%. Hence, if we withdraw £1,000, we would be taking home 75% of £1000=£750. This is 93.75% of the £800 of our initial deposit.
Below I have graphed the linear correlation of the amount in the bank (y-axis) against the amount withdrawn (x-axis) to demonstrate that the amount lost from your initial deposit upon withdrawal, is constant (6.25%).
Percentage loss after withdrawal from the LISA
I suppose it’s called a ‘Lifetime ISA’ for a reason. You are saving as a plan for either of two reasons:
- First time buy
Unless you want to lose 6.25% of your initial deposit.
The Great Alternative
During this volatile, uncertain, rollercoaster of an economic ride we are travelling through, it could be wise and somewhat risk-free (bar inflation, the strength of the pound and the overall collapse of the government system) to pursue the LISA saving route.
You can invest instead. Sounds risky, but the scale of risk is completely relative to how you invest. The safest path is diversifying your portfolio; don’t put all those eggs in one basket, shove them in multiple. If you chuck all your eggs into TESLA right now and after Elon’s 1 to 5 stock split the inflated pice comes crashing down, your eggs won’t just crack, they will undeniably scramble.
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If you don’t have the time to investigate the stock market for the optimum stocks to diversify your portfolio with long-term, I highly recommend ‘Index Funds’. These are, as themselves, diverse. Let’s look at the FTSE 100:
The FTSE 100 is an index composed of the 100 largest (by Market Capitalisation) companies listed on the London Stock Exchange (LSE).
Over the last 10 years, the total return for the FTSE 100 was +103.98% with dividends reinvested or a 7.38% annual return. If you invested £10,000 in 2010, you would have £20,398 today.
Moral of the story
Doing your research before putting your hard-earned coins anywhere will benefit you greatly in the long-term.