A FIRE argument for the LISA

The LISA or Lifetime ISA is a curiosity.  It can either be used for fund a first time house purchase or as a defacto-pension.  Pay up to £4,000 until you are up to 50 and you can acccess it from the age of 60.

Is it any good for FIREes?  Here’s my case for.

I’ve written about the LISA before (here) and as I’ve said, it shouldn’t exist.  In fact it’s strange that the government allows people to store so much wealth free from the tax man (ISA limit is £20,000 a year – which is only fully of benefit to those already well-off).  rats.jpgThe LISA is a very strange product.  You have to wonder who on earth dreamt it up.  From the user;s point of view; it’s potentially free money – up to £32,000 and it’s not taxed when you take it.  You could use it to buy a house – but that might be a stupid idea.  From the government’s point of view it must cost them a lot – but at least they are being seen to be doing something for the young.

Anyway – hey ho, the government plays the tune and we gotta dance.

How the LISA works:  You can pay in up to £4,000 a tax year and the government adds on 25% (up to £1,000) regardless of how much tax you’ve paid.  You can invest it like an ISA in cash or stocks and shares.  Personally, I use AJ Bell/ YouInvest.

I know that some FIREes are not fans of the LISA including Ms Zi You  – in fact there are not so many people who’ve come out to say they like it. Their reluctance to accept it is that it means you have to put your money away for in my case 25 years to get the bonus.  In my situation, I might need that money in 10-20 years time.  My 40s and 50s may involve me being destitute and broke but my 60s will be sweet – with my SIPP, old-final salary pension and even the state pension kicking in!

Putting money away now when I might need it to be liquid (and paper profits that can’t be liquidated have their downsides).  So having liquidity is important for any FIREe.

However, the LISA does have in-built liquidity.  You can cash out early if you need to and suffer a 25% penalty.  That is harsh and is worse than the 25% bonus you received:

Going in: £4000 paid in + 25% (=  £1000) bonus = £5000 at 25% uplift

Going out: £5000 – 25% (£1250) = £3750

£3750 / £4000 = 93.75% or a 6.25% drop

But if you think of things like a gambler you’d have to say, what are the odds of me reaching 60 without running out of money?  Isn’t that what all the fuss around the 4% rule is about?  So on the one hand you have a 25% uplift and on the other you can lose 6.25%.  The pay off is 4:1 or on a balance of odds there’s an 80% chance you’ll not make it to 60 for this to be a fair bet.  Now here is where financial pyschology comes into play – how do you feel about the risk?

I’m more of a fan of facts than feelings.  Topping up our LISAs by £8,000 a year will substantially increase our outgoings and using FIREcalc I can tell that using my latest numbers and a spending of £22,000 or £27,000 (since we can only pay into the LISA until we are 50) the probability of

£22,000 – FIRECalc found that 36 cycles failed, for a success rate of 71.2%.

£27,000 – FIRECalc found that 57 cycles failed, for a success rate of 54.4%.

Firstly that tells me that FIRE right now looks iffy to say the least but also that paying into the LISA results in an 16.8% reduction in success rate.  That’s a 24% increase or roughly one quarter.  So, how would you feel knowing that there was a 75% chance you would win £1,000 or a 25% chance you would lose £250?  Would you take that bet?

I’d say that there is a case for doing so – if you can easily afford the £4,000 a year and already have other FIRE funds topped up.

Thanks, GFF

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11 thoughts on “A FIRE argument for the LISA

  1. I like the way you look at the odds – personally, I’m not a fan mainly as I’m the position where the opportunity cost is filling my normal ISA, which has much lower fees and freedom to remove the money whenever.

    But there are loads of people who it would suit, especially those who haven’t bought a house and are lower rate tax payers.

    Liked by 1 person

    1. Certainly it is an option to be considered when you have isas. Non isa savings , sipps . Salary sacrifice. Higher rate/ lower rate. Lifetime allowance, tax free lump sum etc……. to think about.
      It might not suit everyone but it deserves consideration whatever the case.

      Like

  2. I’m a big fan of LISAs. My approach is to fill my S&S ISA up to £16,000 first so that deals with a lot of the liquidity issue. Also it’s a similar risk to pensions in that regards. It just take a bit more planning.

    I also have a specific plan for my LISA. While our house is fine at the moment by the time I hit 60 I’m sure that there will be a a few of those VERY big things that need doing. I’m thinking of those once in every 20-30 year projects like the boiler or the roof or the electrics. I intend to earmark the cash for that so that the house is then sorted until we are ready to downsize/move into a home/be carried out feet first!

    Liked by 1 person

    1. Nice idea. One option could be to pay off the mortgage with the money – if you had a lifetime interest only mortgage like I used to. I don’t plan spending as far ahead as that – the kids will be in their 20s when i am 60 so i might need the lisa money before then (or the Bomad might go bust!).
      But i would agree – isa then lisa is nicer.
      Although the £2000 dividend allowance per person gives a nit of leeway if you have the surplus.

      Liked by 1 person

  3. Someone in their mid thirties with new sprogs might think the LISA just the thing for financing the children’s housing deposits. Having your children well housed in their twenties might make it easier for them to help you in your eighties.

    Anyone limited to £10k p.a. TAA pension contribution might like to use a LISA to the max: it’s a 50% boost to tax-favoured gross savings for old age.

    Liked by 1 person

    1. I haven’t budgeted for giving the children house deposits.
      Hopefully in the distant future, housing costs will have fallen relative to earnings so you don’t need to have rich parents to afford a roof over your heads or to spend half of your working life working to pay for it.
      (I’m prepared to be disappointed).

      Like

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