Lisa: great for first-time buyers, not so good for your pension
We explain how to make the most of the new government scheme
The Lifetime Isa — or Lisa, as the savings and pensions vehicle to be launched in April is known — should be viewed largely as a way to save for a house and not as a sole retirement option, according to a financial education and pensions adviser.
Data produced for Times Money by Wealth at Work shows that a typical first-time buyer could get on to the housing ladder two years earlier using the Lisa than they could by saving through a general bank account.
The Lisa, heralded by George Osborne as the new way to save towards a first home and retirement, is essentially a savings account offering an 18-year-old up to £32,000 in cash from the government. Savers are allowed to put £4,000 a year into the account, until the age of 50, and the government will provide a 25 per cent bonus at the end of the tax year — up to £1,000 a year.
The scheme has proved controversial, with some pensions experts fearing that it will stop people from paying in to other pension schemes. Ros Altmann, the former pensions minister, says she would like to see it scrapped because, without proper guidance, people could end up withdrawing the money too soon and paying a hefty exit charge.
“Instead of using it as a proxy pension, why don’t we just use it for a house purchase if that is what is required and for helping people on to the housing ladder, and keep pensions as pensions,” Baroness Altmann said in June.
Wealth at Work’s calculations show that if you compared two 25-year-olds earning £26,500 a year, both aiming to save a 10 per cent mortgage deposit to buy a house worth £194,224 (the average first-time buyer house price), the one putting £2,000 a year into a Lisa would save a deposit two years earlier than the one putting £2,000 into a savings account, assuming a typical savings interest rate of 0.5 per cent.
If the pair continued to save £2,000 a year for their pension after getting their deposit, the Lisa saver’s two-year advantage would give them more than £18,000 extra in their pot after 35 years.
Jonathan Watts-Lay, a director at Wealth at Work, says: “Interest in the Lisa has been taken over by the pensions debate. Yet if you’re saving for your first property, why would you not save into this? A lot of people are paying more for rent than they would on a mortgage. And because savings rates are so bad — and could be for a while — the 25 per cent cash uplift offered by the Lisa means you can save much faster for that deposit,” he says.
With a Lisa, savers can net a potential £32,000 in bonuses
“Then, after that, you can decide what to do regarding a typical pension versus the Lisa, or invest in both.”
The choice over whether to choose a Lisa or a traditional pension model is far more complicated, Mr Watts-Lay says, depending on how much tax you are likely to pay when you are earning and during retirement.
One of the main criticisms of the Lisa has been that it could discourage young people from putting money into pension schemes that benefit from employer contributions, which considerably boost pension pots.
Mr Watts-Lay says that for first-time buyers the Lisa is preferable to the Help to Buy Isa, which has a savings limit of £200 month and £12,000 in total. Like the Lisa, it offers savers a 25 per cent free cash uplift, but has a maximum savings total of £15,000.
With a Lisa, savers will be able to make contributions and receive a bonus from the age of 18 to 50, netting a potential £32,000 in bonuses. A Lisa must be opened before the age of 40.
The Help to Buy Isa also has a £250,000 cap on the house price you can put it towards, (£450,000 in London). The Lisa has a house price cap of £450,000 everywhere. The schemes stipulate that the money must be used for a first home.
If a saver makes a Lisa withdrawal for anything other than a first home before the age of 60 they will lose the government bonus and face a 5 per cent fee. Despite the risk of an exit fee, however, the Lisa still compares well with the savings bond announced in last week’s autumn statement.
The bond from National Savings and Investments, which is backed by the Treasury, will pay interest of about 2.2 per cent for up to three years, but will have a maximum deposit limit of £3,000.
‘We immediately fell in love with our new home’
Edward Calderbank, 24, a supervisor for an environment agency, and his partner, Lauren Moss, 23, an office manager, were living with their parents when the Help to Buy Isa was launched a year ago.
The scheme gives savers a 25 per cent boost (up to a maximum £3,000) for money they save towards a mortgage deposit.
When the couple found The Amber, a two-bedroom house with a roof terrace and garage at Crest Nicholson’s Rosewood development in Colchester, Essex, they immediately fell in love with the place. They bought the property for £235,000 using a £900 Isa bonus and moved in recently.
Edward says: “It’s the perfect location for us because I can hop in the car and be on the road on my way to work in no time, which is ideal.”
Rosewood is already a well-established community. Edward says: “It was always at the front of our minds during our property search, ever since my Mum bought her home there, and we already have some happy memories of the development as a family.”
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