It’s that time of year again; the new tax year! And that means your allowances all renew. ISAs, SIPPs, JISAs, LISAs, VCTs, EIS, SEIS, dividends… all open again but in which order should you fill them up and when? For me it’s simple, I start with the LISA.
Everyone’s financial situation is different – so what applies to me won’t necessary apply to you – and what I do this year might not be what I do next year but I try to be consistent with my decision/mistakes and stick to them. I’ve just finished topping up the Lady’s and my Lifetime ISA accounts and look forward to getting 2 x £1,000 from Rishi Rich in May. The LISA is much maligned but I like it and think that it has its place for FIRE planning. There’s a great post from Banker On FIRE that is worth a read through – suitable for non-bankers too btw.
When it comes to financial planning, it’s worth knowing and understanding you annual allowances and the rules behind them are and then to understand how to make them work for you. The HMRC / Money Advice Service is a font of knowledge and good links include: (You don’t need me rewriting them)
£4k, £20k, £40k, £120k
You should probably keep these numbers in your head. £4,000 is your LISA limit for the tax year, £20,000 is your ISA limit, £40,000 is your Pension limit and £120,000 is the most you can contribute to your pension over 3 years (the so-called carry-back). You’ll notice that all of these numbers are quite large. If the average full time wage in the UK is less than the annual pension allowance, with a bit of perspective you can see that these allowances are generous. But the truth is that the government’s generosity is a little disingenuous, most adults don’t have an ISA and most of those that do don’t contribute each year.
ISA uptake – pretty poor really
ISAs have been around for a while now and whilst there will be some stories of ISA millionaires, the truth is most people don’t have a million pounds sitting in their ISA. In fact most people don’t have an ISA, so just by having one, you are already better than most!
Reading through the most recent HMRC report on ISAs, which is an eye-opener. The average amount subscribed by those who do is around £6,000 which is far less than the £20,000 limit.
Even more striking is that it appears that most ISA holders don’t subscribe and that average ISA values are less than £50,000 even for the oldest (and richest) cohort. Or in other words, in 13 months (over 3 tax year) you could have more in your ISA than 85% of ISA holders.
My quick research indicates that Lifetime ISAs have a comparatively low take-up and form just a minor fraction of the number of ISAs taken out. My like of LISAs is a minority pursuit.
Based on this, I’d imagine that the government could increase the ISA limit to £1,000,000 and it wouldn’t change things that much – using all of your allowances is a not common occurrence and arguable the rich (including me) don’t need extra help (although I’ll take whatever’s coming thank you very much Rishi). On principle I don’t think that the LISA should exist but on principal I won’t turn my nose up to it.
Thanks for the Lifetime ISA must go to Rishi Rich who is the Chancellor of the Exchequer. While he may not have invented the LISA, it’s in his gift to keep or cancel it. My own view of the dire mess that we are in as a result of Covid is that there will be a lot of pain to come in the future. Rishi is the one that gets to decide the future tax rules. The LISA is just one plank for my family’s financial future. ISAs are another; likewise pension (SIPP) contributions. My very real concern is that since austerity is so unpalatable and since you can’t really make much money off those who rely on state benefits like Universal Credit to survive, the axe will fall on me.
Pensions are even worse. The average pension pot in the UK is pitiful and it’s long been my view that a 20-40-20 life (20 years a child/student, 40 years in work and 20 years of retirement from 60) isn’t realistic for many when 20 becomes 25, if you are lucky, work starts with a massive student loan and your lifetime earnings are weak, cost of living higher (housing the main culprit), 68 is the new 60 and there’s no gold plated inflation bomb proof final salary pension to retire on when you’ve been saving less than £3,000 a year.
Why I like the LISA
It’s quite simple really; I like the LISA primarily because of these four reasons:
- 25% / £1000 free bonus per annum on what’s invested
- It runs until I’m 50 (so around £17,000 in free cash
- I can access it at 60 – tax free (unlike a pension)
- I can raid it early if needs be (but suffer a 25% penalty)
The £4,000 comes off the £20,000 ISA allowance by the way. Critics of the LISA point out that you might be better off paying into a SIPP (probably true) and they don’t like the access at 60/25% penalty. However, our own situation is that it’s highly unlikely that we’ll ever fully deplete our savings to the point of plundering the LISA – and I think that most people who are on the journey to Financial Independence are in the same boat (if they are honest with themselves).
Why the LISA first?
The answer is because it’s better to invest early in the tax year and the 25% bonus gives an added punch to our assets and it’s easy to get them out of the way. £4,000 per account is a lot more manageable than £16,000 in one account. I like to keep our cash working for us and I don’t leave large sums lying around in our current account. I can also invest all that £4,000 in one go and reduce trading costs (which can add up), whereas I might need a few bites at £16,000 (paying in £4k on month £6k the next and so on) to become fully invested. There’s a bit of juggling to be done and getting the LISAs out of the way makes everything a bit easier – they are subscribed to now and that’s it, done and dusted for 2021/22.
Is a LISA a good investment vehicle?
These are just my own ideas. They may or may not work for you. There are those who don’t like the LISA and (only me?) those who like it. My financial backstory is one that will give you the impression that I’ve got issues around money. Arguably, since we are probably financially independent I should stop obsessing so much but it’s hard to stop caring when it’s what you care about. If you are in the lucky position to earn more than you spend and can invest that wisely, good luck. Over time, this can offer you a level of freedom that few have in life and if you can decouple your spending/status with how you feel about yourself then even better. To put it simply; I fill up my LISA first because I can.
And if Rishi is reading this, please keep the LISA in place please!