The new Lifetime Isa should be killed off and replaced with a simplified model, said industry experts this month.
The Association of Accounting Technicians argued that the Lifetime Isa, or “Lisa”, which was introduced in April 2017, should be scrapped amid warnings of a possible “mis-selling problem”.
Former pensions minister Baroness Altmann led the calls, arguing it was “not safe” to sell the Isa without financial advice. Yet thousands have opened accounts, despite few providers offering them. There is just one cash Lifetime Isa and a handful of investment options, almost a year after launch.
The Lifetime Isa allows up to £4,000 to be saved each year, which is topped up by a 25pc Government bonus. The savings can be invested or left in cash, and are designed to be spent on a first property purchase or to fund retirement from 60.
However, the Lifetime Isa contains features that can catch out unsuspecting savers, such as an “early exit” penalty, if you want to remove your money before the age of 60 for anything other than buying your first home.
While set up to reclaim the Government’s generous bonus, the exit charge means that savers end up out of pocket.
As savers rush to top up their allowance before the start of the new tax year, Telegraph Money looks at where the first generation of Lifetime Isa investors are putting their cash.
How are other people investing?
People saving over the long-term should invest in stock markets to maximise returns. Those planning to use the money in the next few years, or who have a very low risk tolerance, should stay in cash (see page 2 for investment tips).
Skipton Building Society is the only cash Lifetime Isa provider. At launch, it paid 0.5pc interest, but this has since been increased to 0.75pc. As it has no competition, it has been hugely popular, with 65,000 people signing up.
The average Skipton Lifetime Isa customer is 26 years old, and 72pc of them are saving for a home, compared with 13pc saving for retirement (the remainder are saving for both). All other providers offer investment or “stocks and shares” offerings only, although some allow investors to stay in cash.
On the A J Bell platform, a third of its 5,000 Lifetime Isa customers’ assets are still in cash. This is a marked drop from nearly half of assets in September last year, but still remains high for a provider that pays no interest on cash holdings.
Another 40pc of the assets are in investments funds, while 12pc are in directly held stocks. Around 9pc of total investments are in quoted investment trusts, with 8pc in passive vehicles, which includes stock market “trackers” and exchange-traded funds (ETFs). The top funds are dominated by A J Bell’s own multi-manager portfolios, which invest in a range of different fund managers.
Once these funds have been stripped out, Vanguard’s LifeStrategy range of funds is most popular. These “one-stop shop” funds from low-cost provider Vanguard aim to provide a diversified mix of asset classes, with each of the five funds having a different allocation to the stock market.
Other popular funds include Fundsmith Equity, run by Terry Smith, and Scottish Mortgage Investment Trust, both of which invest in global stock markets.
Around 30,000 people have opened a Lifetime Isa account through Hargreaves Lansdown, Britain’s largest provider of stocks and shares Isas. There is a broader range of funds held via the “fund shop” compared with A J Bell, with the top 10 including emerging market, and Asia-focused funds. The ever-popular Fundsmith Equity and Lindsell Train funds also appear.
Digital broker Nutmeg’s offering is highly restricted. Investors cannot hold money in cash and must choose between two different types of ready-made portfolios.
More than half of the 8,000 savers using Nutmeg opted for its “fully managed” portfolio, the more expensive at 0.75pc a year. The remainder invested in the “fixed allocation” portfolios, costing 0.45pc.
Similar to Nutmeg, the Share Centre only allows investors to put their money in three ready-made portfolios, depending on how much risk they are willing to take. A quarter are in the cautious portfolio, 30pc in balanced and 45pc in adventurous. However, a third of investors are holding money in cash – earning no interest.
How should I invest my Lisa?
If you’re starting out with a Lifetime Isa, how do you know what to invest in? For many, it will be their first venture into the stock market.
The rule of thumb is that to invest, rather than save in cash, you need to be comfortable locking your money away for at least five years. This means that those in their late teens or those who expect to be saving for a long time before buying a property should have exposure to stocks.
Tom Beckett, chief investment officer of wealth manager Psigma Investment Management, recommended a low-cost stock market “tracker”, which mimics the price movements in a particular market, rather than employing an asset manager to take tactical bets.
For those using the Lifetime Isa to save for their pension – and so not withdrawing money for 20 or more years – Mr Beckett recommended Asian stock markets, as they have “better growth prospects than the developed world and companies’ shares are cheaper there”.
In particular, he recommended Blackrock Asian Growth Leaders, which invests at least 70pc of its assets in Asian companies, including technology giants Tencent and Samsung Electronics. Another trend that is likely to pay out over the long term is healthcare. Mr Beckett tipped Polar Capital Healthcare Blue Chip as a fund profiting from this area.
For investors with a shorter time horizon, taking stock-market risk may not be the best option. Rather than going straight to cash, consider fixed income assets such as bonds.
He recommended the TwentyFour Dynamic Bond fund: “I would expect the returns to be close to or surpass inflation in the coming years and to match gains in UK house prices.”
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