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Should you invest in a Lifetime ISA? (UK)
The Lifetime Individual Savings Account (LISA) is a government saving scheme in the UK intended primarily to help individuals between the ages of 18 and 50 buy their first home (among a few other things). You can hold your money either as cash or in stocks and shares.
The unique selling point of the scheme is that the government will add a 25% bonus on all savings up to £4000 per year. However, this comes with several restrictions. The account is intended to only be used for the following purposes:
1) to buy your first home, worth £450k or less
2) if you are aged 60 or older
3) if you are terminally ill
The government do permit individuals to use the money for other purposes, with the caveat that a 25% cut will be taken before doing so. Seems like a no brainer? Not quite.
Suppose you invest in your LISA. The government bonus puts this up to . Suppose later you decide to withdraw your money for purposes other than (1-3). Then you end up with . That's a 6.25% loss!
So when does it make sense to use your LISA? Suppose further you have some uncertainty over whether you will use your money for (1-3). Most likely, you are worried that you might not buy a home in the UK, or you might want to buy a home over the price of £450k (because for instance you live in London, and £450k doesn't stretch that far).
Let's compute the expected value of your investment if the probability of using your money for the purposes (1-3) is (which likely means your probability of using it for 1 is also about ). Suppose we invest £. For our investment to be worth it, we should expect at least £ back.
EV = (bonus scenario) + (penalty scenario) = , implying .
So, you should use your ISA if your probability of using it to buy a home (or 2,3) is above 20%. This is surprisingly low! Note further this calculation applies regardless of if you use a cash or stocks and shares LISA.
I havn't ever seen this calculation written up publicly before so thought it was worth sharing.
Well, it seems like a no-brainer to store money you intend to spend after age 60 in such an account; for other purposes it does seem less universally useful. I'd also check the treatment of capital gains, and whether it's included in various assets tests; both can be situationally useful and included in some analogues elsewhere.
I don't think it's great for post age-60 actually, as compared with a regular pension, see my reply. The comment on asset tests is useful though, thanks. Roughly LISA assets count towards many tests, while pensions don't. More details here for those interested: https://www.moneysavingexpert.com/savings/lifetime-isas/
(not in the UK, first I'd heard of this) That 6.25% net penalty is less than the US penalty for tax-protected savings (401k), which is 10% And the US Government doesn't even kick in (some employers do, and the deferred taxation is significant over many years). The chance that you'll buy a house doesn't even need to enter into your calculations, if you include the chance that you'll live to age 60, it seems like a very good deal.
Couple more things I didn't explain: