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). The 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.