Close Lifetime ISA and put into index funds?

[Chichaldo]

Currently 24 y/o, not looking to purchase a house in the near future.

Opened up a LISA several years back, and currently have 12k (deposited) + 3k (25% gov bonus) in the account with interest (400 or so).

I recently overhauled my current, savings and now S&S ISA accounts (holding for long-term 25, 30+ years) and think that the money sitting in the LISA is just not being utilised.

Put simply, the 3k gov bonus that I can only access upon buying a house or reaching the age of 60 is nothing compared to what can be accumulated over time putting that money in my index fund portfolio. Especially since I am not looking at buying a house in the next 5 years, if not more.

It'll sting to take out the LISA money with a 25% penalty leaving me with less than I started with 3/4 years ago (a loss of £450 approx.), but long-term I'm thinking this recuperates that easily.

An alternative is to transfer my current cash LISA into a HL LISA where I can invest in index funds - this would be splitting my money though, losing the potential to compound and would also still mean I pay a hefty penalty down the line if I were to take out the cash when I'm 40 or 50 still.

Any thoughts are appreciated, cheers!

[Urbandreamer]

You can hold index linkers in a stocks and shares LISA.

I would advise NOT closing the LISA, but if it is a cash LISA contacting the likes of II, A J Bell or HL and seeing about moving the LISA to them so that you can invest in your index linked funds.

However I'm not a fan of LISA's. While I suggest keeping it going I'd recommend investing no further money in it. Ether or both a standard stocks and shares ISA or SIPP makes better sense, unless you intend using it to buy a house.

The aspect of "splitting your money" is less of an issue than you think. You can after all hold the same index linkers in all, invest in accumulating funds to maintain compounding or reinvest any distributions.

Here is how to look at it, SIPP & LISA: Effectively the same tax advantages at retirement age. In one case the contributions are boosted by your tax band, in the other a bonus at the end based upon standard rate tax. I.e assuming no growth £80 contribution with rebated standard rate tax = £100. Alternatively £80 with 25% bonus = £100. The bottom line is the same, all that differs is which numbers are used to calculate it.
Standard ISA great flexibility, all growth is tax free.

[Chichaldo]

The aspect of "splitting your money" is less of an issue than you think. You can after all hold the same index linkers in all, invest in accumulating funds to maintain compounding or reinvest any distributions.

Thank you for your response!

I was about to ask, and had typed: "Is your comment on not closing the LISA based on not touching it until I can withdraw without penalty? I can see in this instance that it would make no real difference in the final sum this way. I'm contemplating taking the LISA penalty 'hit' now whilst the sum is lower in the potential circumstance where I would like to take money out when I'm 40 or 50 instead of waiting until I'm 60 (or whatever the age is raised to by that time)."

Running some numbers though, and keeping the starting figures simple:

a) 10,000 S&S ISA + 10,000 LISA and then taking the 25% penalty on the LISA sum
-vs-
b) 17,500 S&S ISA (closing the LISA, 25% penalty)

Assuming an 8% year interest rate, investing in the same index funds for 20 years.

a) 49,268.03+(49,268.03*0.75)= £86,219.05

b) £86,219.05

My understanding of mathematics must be dwindling as it makes no difference, unless I've run the numbers wrong.

The bonus of keeping the money in the LISA would be if I do indeed leave it until I'm of retirement age or buy a house, I'm paying no penalty.




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Separate Q, since my money is already in the LISA with one provider, does that mean if I transfer it to a LISA provider where I can invest then it doesn't count towards the £20,000 ISA annual limit as the money is already in an ISA 'tax wrapper'?

Asking as I opened my S&S ISA this year with £16,500 and an emergency fund cash ISA of £2,000 (although this was also transferred within the same bank as part of an existing cash ISA I held, so perhaps doesn't count towards the annual ISA limit either).

[Urbandreamer]

Separate Q, since my money is already in the LISA with one provider, does that mean if I transfer it to a LISA provider where I can invest then it doesn't count towards the £20,000 ISA annual limit as the money is already in an ISA 'tax wrapper'?

Asking as I opened my S&S ISA this year with £16,500 and an emergency fund cash ISA of £2,000 (although this was also transferred within the same bank as part of an existing cash ISA I held, so perhaps doesn't count towards the annual ISA limit either).

My suggestion was really that you keep the LISA until there is no penalty, while building funds elsewhere in case you need more flexibility.

With respect to the other stuff, yes you can transfer an existing ISA/LISA without effecting current year contributions, as long as you TRANSFER.

That is you need to ask you new provider to contact your old provider and transfer the contents, rather than take the contents out and attempt to put it in a new ISA/LISA. The latter would count as a contribution this year.

[wanderer]

You're 24 years old and you're already thinking 25 years ahead. That's commendable and it tells me you are well on the way to being a committed long term saver/investor.

When it comes to age 60 (or whatever the Lisa withdrawal date is), given your long sighted attitude to investing, it is very likely you're going to be sitting on various nest eggs waiting to hatch. There's nothing wrong with one of those being a LISA, so why not sit tight and tell yourself that that government bonus is something to look forward to in the 2060s or whenever. It doesn't seem you *need* the money now.

In the meantime, why not switch it into a cheap S&S LISA (I suggest looking at dodl from AJ Bell) and let it compound as a cheap world tracker (they do a very cheap global tracker).

There are various pros and cons of LISAs but they are structured to promote long term saving. That's why there's a 10 year gap between the last date for a contribution and the date for the retirement withdrawal. I think a 25% potential uplift is a great incentive in that context and - if you are saving for the long term and into retirement anyway - don't quite understand why people knock it. You should spread your risk, including the risks of government legislation changing, so a spread of pensions, ISAs and other investments for retirement makes sense.

On your question about the annual allowance, you are allowed 20k in total ISA contributions per year, of which no more than 4k can go to the LISA. If you've already invested 18.5k then there's only 1.5k left which you can put into ISAs /LISAs this year. Transfers of existing ISA investments don't count towards the limit but for ease of paperwork I would steer clear of opening ISAs and transferring them both within the same tax year.

[xxd09]

You made a good initial saving decision with the LISA but nothing for nothing in this world-if you get government bonuses/tax relief-there will be conditions quite rightly
Good advice/posts here to now leave LISA well alone -enjoy it at 60
You have learnt another financial lesson
Open up a Stocks and Shares ISA and start over again
xxd09

[airbus330]

"Currently 24 y/o, not looking to purchase a house in the near future."

But one day you won't be 24 and you. most likely, will want to buy a house at some point. Why not hedge the bets and take the taxmans 25% bonus for half your future savings and index the other half in an S&S ISA. Your investment saving for a house deposit is likely to be relatively short term (10y or less), so having half your money somewhere safe seems prudent. Both my kids used/are using LISA, I think they work best for home purchases where you are planning to buy within 5yr.

[Hariseldon58]

Well down for starting investing so early.
Good advice here, transfer the LISA to one where you can hold shares/trackers etc.

You will end up with multiple investments/accounts and it makes little practical difference, I’ve had similar thoughts re ‘neatness’ ! It does provide some valuable diversification in having multiple brokers / product providers.

The decision can be deferred indefinitely, ie there is no benefit in paying a penalty to remove the LISA restriction now, rather than later.

If you need the money at a later point take the decision then, it’s possible that you may be able to avoid the penalty , ie buy a house , circumstances change.

There are talks about simplifying ISAs, you’d curse if you took the penalty now only to see it abolished in a couple of years.

I went down the investing route at the ago of 31 with £2,000 and retired in my late 40’s , well before the talk of fire, investment returns are lumpy, I’ve averaged 10% plus over the last 34 years, but you will have mult year periods when below a portfolio high and then out of nowhere comes a new high, just keep on investing, through thick and thin and don’t overthink it ( my biggest failing !)

[hiriskpaul]

Here is how to look at it, SIPP & LISA: Effectively the same tax advantages at retirement age. In one case the contributions are boosted by your tax band, in the other a bonus at the end based upon standard rate tax. I.e assuming no growth £80 contribution with rebated standard rate tax = £100. Alternatively £80 with 25% bonus = £100. The bottom line is the same, all that differs is which numbers are used to calculate it.
Standard ISA great flexibility, all growth is tax free.

You missed out one important detail - tax when you withdraw your money can make a big difference to the outcome.

Take £100 from the LISA and you get to keep all of it. Take £100 from a SIPP, 25% tax free, 20% income tax and you are left with £85. It is true that those with very small pension pots may be able to withdraw all the money from a SIPP without paying tax, but for most this is going to be unlikely.

For basic rate taxpayers, in accumulation and decumulation, the LISA is better than a SIPP. For higher rate taxpayers it is more complicated as it depends on the tax in drawdown, but if 20% tax is paid on withdrawals, the SIPP is better.

[Urbandreamer]

You missed out one important detail - tax when you withdraw your money can make a big difference to the outcome.

Take £100 from the LISA and you get to keep all of it. Take £100 from a SIPP, 25% tax free, 20% income tax and you are left with £85. It is true that those with very small pension pots may be able to withdraw all the money from a SIPP without paying tax, but for most this is going to be unlikely.

For basic rate taxpayers, in accumulation and decumulation, the LISA is better than a SIPP. For higher rate taxpayers it is more complicated as it depends on the tax in drawdown, but if 20% tax is paid on withdrawals, the SIPP is better.

Yes I did. I actually thought about it afterwords, but decided that it wasn't worth ME adding to the thread. I'm glad that you have.

I didn't think of it initially as I can't/couldn't open a LISA. Hence there was no point in thinking about the advantages of doing so.

I'm STILL less than convinced about LISA's, but your point DOES make them financially better that pensions. A trade off for their later access date.

[Wuffle]

It is worth noting that the reality of long term financing is that being mortgaged and therefore leveraged to hell against trend rising prices, wages (everything) is what does the business.
The leverage will apply to the investments despite being nominally against the property.
You will likely adopt the social norms because it works, so the LISA will become useful.

W.