Lifetime ISA: Cash or Stocks?
This is a question that I posed to myself this time last year.
Background
The Lifetime ISA (LISA for short) is one of the best bank accounts available in the UK. Available for both first-time homebuyers, or those who are looking to save for retirement, the LISA allows you to pay in up to £4,000 per tax year in return for a 25% Government bonus. This bonus is capped at £1,000 per tax year, and can be a huge boost to first-time homebuyers.
The LISA is an account that can be opened from the age of 18, but cannot be opened beyond the age of 39. There is also a catch that if you withdraw money from the account for anything other than your first home, or retirement, then you get hit with a 25% penalty which wipes off your bonuses earned alongside your hard-earned cash.
Illustration:
You pay in £4,000 and receive a £1,000 bonus
New balance = £5,000
£5,000 x 25% = £1,250
Money in your bank = £3,750 after early withdrawal
If you become terminally ill you can withdraw without this penalty, but generally you should not be using a LISA for anything other than your first home or retirement!
Options
You can open two types of LISA in the UK; a Cash LISA which you pay cash into and gain interest on over time, and a Stocks & Shares (S&S) LISA which you can use to hold stocks and shares (believe it or not) and gain capital growth and dividends over time.
It is important to understand that investing in a S&S ISA should be dealt with as any other form of investing, and therefore due care and research should be taken before doing so!
Let’s weigh up the pros and cons of each option:
Cash LISA - Pros
Your contributions will not decrease in value
You know what interest you will be earning
Cash LISA - Cons
Your cash is losing value from inflation
You could be earning more in a S&S ISA
S&S LISA - Pros
There is possibility for higher returns
The Government bonus gets invested too
S&S LISA - Cons
Your contributions can decrease in value
You will want to be looking at buying a house beyond 5 years to minimise risks of this
My Experience
I have both a Cash LISA, and a S&S LISA. This is because you can open a new one every tax year but can only contribute (pay in) to one LISA per tax year.
I used a Cash LISA for tax years 2017/18, 18/19, 19/20 & 20/21 but opened a S&S LISA for the tax year 2021/22 (the current tax year).
This was the result of decreasing interest rates on my Moneybox Cash Lifetime ISA, and so I wanted to see whether I could get better returns with a S&S LISA.
So I opened a LISA with Nutmeg last April and have contributed £4,500 so far this tax year with 1 x £333 payment pending from me and 2 x £83 bonuses pending from the Government.
As of 24 March my returns for the last 12 months have been £27.10 after fees. This works out at an average return rate of 0.60% which is higher than than the 0.30% interest I am being paid on my Cash LISA.
However, this was drastically higher before the the recent stock market downturn being up as much as 5.64% at the end of 2021.
What I’m doing next year
With the new tax year around the corner, I have decided that with the results of the last year I will be using my Nutmeg S&S LISA for a second year with hopes to continue stronger growth than my Cash LISA.
I will keep my Cash LISA as is with Moneybox despite there being better rates available elsewhere because the customer service available from Moneybox is second-to-none, and the app is really easy to use.
However, I think that I will be using S&S LISAs continuously going forwards until I buy my first home.
What should you do?
Unfortunately, I can’t advise you on the best course of action but hopefully reading the above has given you a bit of food for thought!
You can check out the best ISAs available on the market right now on our page on ISAs here. Plus if you do opt for a Nutmeg LISA you get 6 months fee-free.