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Investor Views: Why We Invested in a Lifetime Isa

Private investors Rory and Rosemary Walsh are hoping a Lisa will help boost their retirement prospects

Emma Simon 19 June, 2019 | 10:54AM

walshes

Rory and Rosemary Walsh — who are both in their 30s — have taken advantage of the new Lifetime Individual Savings Account (Lisa) to help boost their retirement funds. The new type of Isa was launched in 2017 as a way to encourage people to save either for their first home purchase or for retirement.  

Rory, who works as an editor and freelance writer,  says the couple took out a Lisa, when they were first introduced. He says: “At the time we were both working full-time in central London, and it was before we had our first child, so we had more disposable income.

“The Lisa appealed to us, as we feel that the state pension and workplace pensions may not be sufficient on their own. We also didn’t want to miss out on the government contributions too.” 

The Lisa was launched as a “halfway house” between traditional Isas and pensions. Investors can contribute up to £4,000 a year, and at the end of the tax year, the government adds a 25% bonus. Contributions made into a Lisa will count towards an individual’s overall £20,000 Isa annual limit.

Rosemary adds: “We wanted to ensure we could retire and not need to work into old age. Hopefully these savings will also help cover us against any ‘time bombs’ like future healthcare and convalescence costs.” 

She says having their son has also changed their financial priorities. “We don’t want to be a drain on his future income or be a burden on him or others.” 

At the moment these accounts can only be opened by those aged between 18 and 40, and the bonus is paid on contributions made up to the age of 50. 

One key difference from pensions, is that investors can withdraw funds to pay for a deposit on their first home. Otherwise funds roll up and can be withdrawn penalty-free from the age of 60. Unlike pensions, there is no income tax to pay on these withdrawals.

However, there will be penalties to pay on those withdrawing funds before the age of 60 (the only exception is for first-time buyers). 

The 25% government top-up is broadly equivalent to basic-rate tax relief on pensions. However, this is only payable on £4,000 a year. It is possible to save up to £40,000 a year into a pension (depending on earnings) but realistically, most people will not be able to afford to put aside sums of this size. 

Figures published this week show that almost 300,000 Lisas have been opened since launch, despite there being relatively few providers offering the accounts. Lisa investments are estimated to be worth some £1.4 billion, or £1.8 billion if the government bonuses are taken into account. 

As with a normal Isa, individuals have the choice to keep their funds in cash, or to invest in funds and equities. 

The Walshes have opted for a Lisa from Foresters Friendly Society. This invests the contributions and the government bonus in its With Profits fund, a mixed-asset fund that aims to smooth out stock market returns over the longer term.  With profits funds pay annual and final bonuses to their investors, although these are dependent on stock market returns. 

The couple felt this was a less risky option than a straight equity fund and complements their other savings. They say rather than contribute monthly they tend to put lump sums into this account as and when they have some surplus savings. 

The couple both have some cash Isas for short-term savings, and also have a longer fixed term bond with a mutual building society. Rosemary — who does voluntary work through her local church — liked the idea of saving with friendly and mutual societies, many of which contribute to charitable or community-funded projects. 

Rosemary, who works as a court secretary, previously held shares in RBS (RBS), prior to the financial crash in 2008. She says: “We did get our fingers burnt and from this have learned the importance of diversifying investments, and the fact that there are no companies out there that are too big to fail.”

RBS has a four-star rating from Morningstar, reflecting the fact that its shares are still trading below the "fair value estimate" for the company. Morningstar analysts paint a far from optimistic outlook for the troubled bank. 

It says: “While there are signs of green shoots in Royal Bank of Scotland's revenue generation, challenges regarding litigation and restructuring costs, as well as revenue generation, remain to be dealt with in the short term.” Morningstar points out that the bank has no economic moat, its uncertainty rating is high, and its stewardship is rated as "poor".  

Elsewhere, the couple invest in workplace pensions for their retirement. The couple say that they try to ensure that these are invested sustainably for the future.

Rosemary has a Church of England workplace pension where she has recently opted to only invest in ethical funds. She says: “It’s not just our future that is important but the future of the planet as well. There’s no point having a great pension pot if we’re all underwater.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk

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