Updated 15 October 2019
People using the Lifetime ISA to save for a first home, or to boost their retirement income, may be sacrificing thousands of pounds to avoidable management fees. But lower cost alternatives are available. Article by Nick Green.
The Lifetime ISA (LISA) has been a godsend for first-time buyers, offering the fastest way to save a deposit for a first home, and also for people saving for retirement who want extra funds in addition to their pension. However, many savers may be failing to achieve the full value of their LISA due to paying over the odds for ready-made investment portfolios.
The LISA comes with a 25 per cent bonus on savings, provided the money is used for the deposit of a first home (or withdrawn after the age of 60). It effectively replaces the Help to Buy ISA, which closes to new savers from 30 November 2019 (though existing holders can keep claiming the Government bonus on deposits until 1 December 2030).
Like any ISA, a LISA can consist of either cash savings or stocks & shares. Cash savings are more predictable, but with the best available interest rates currently at around 1 per cent, impatient would-be homebuyers often take the stocks & shares option. But the current choice of LISAs is limited, with only three major brokers offering them and only two of these offering self-managed portfolios.
As a result, many stocks & shares LISAs come with relatively high management fees. One broker, the Share Centre, charges ongoing fees of up to 1.68 per cent, while another, AJ Bell, charges 0.84 per cent plus platform fees of 0.25 per cent. The biggest broker, Hargreaves Lansdown, charges 0.45 per cent for funds, or 0.45 per cent (capped at £45) for shares and investment trusts.
Saving at the maximum rate, a first-time buyer could build up a deposit of £32,000 in just under six years, assuming average investment growth of around 3 per cent. However, using a platform charging these kinds of fees might cost a saver more than a thousand pounds over that time period, compared to a self-managed or passive investment fund.
Losses due to excessive management fees may be even higher for a LISA used to save for retirement. The longer-term potential of LISAs is somewhat under-publicised, but they are a value extra tool for supplementing pension savings. Though not a substitute for pensions, they do have certain advantages of their own – the main one being that withdrawals do not count as income, so are not taxed (though they can only be taken without a penalty from age 60 onwards). The other big advantage is for high earners who may be near their pension lifetime or annual allowances. Since the LISA is not a pension, LISA savings do not count towards your pension allowances, so may be a useful savings pot for any excess money, while providing the same 25 per cent bonus.
However, fund management fees can significantly eat into a LISA over a longer period of time, in some cases by up to £6,000 over 10 years. By contrast, there are low-cost passive funds available that deliver similar performance for total fees of under 0.25 per cent. The other alternative is a cash LISA, which is fee-free – the downside of this may be slower growth, but equally it will not be vulnerable to stock market fluctuations.
The alternative to a passive fund is a self-managed fund. This means the investor (or their financial adviser) is completely responsible for the management and monitoring of all investments in the LISA. As such it may not be suitable for the novice investor, but for those who already have some knowledge of investment strategies these LISAs may provide better long-term value.
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