Experience has taught me that the root cause of financial disagreements within families is often simply silence
Is it Time to Help your Children Buy a House with LISA?!
Like parents and grandparents across the UK, many Start FP clients are looking at ways to help their children get on the property ladder. Among the many ways in which assistance can be provided is the Lifetime ISA or LISA – a relatively obscure product which first became available in April 2017.
A LISA can be opened by anyone between the ages of 18 and 40. Both cash and ‘stocks and shares’ options are available. For every pound invested by the account holder, the government adds a further 25% bonus up to a maximum of £1,000 per annum. The bonuses are paid on a monthly basis, assuming contributions have been made in that month, so account holders can benefit from compound interest.
Monies can be added to the LISA up to the age of 50. In theory, therefore, someone opening a LISA at the age of 18 and investing £4,000 per annum up to the age of 50 would receive £32,000 of ‘free’ money from the government.
The LISA has been designed to help those building savings to fund a deposit for their first home or for their retirement. With regards to funding a deposit, monies in the LISA can only be withdrawn for a first-time house purchase. Funds withdrawn for any other purpose carry a 25% discount penalty unless the LISA is left to run until the account holder is 60 years old when all monies can be withdrawn without a penalty.
There have been criticisms of LISAs in the financial and political press. Politically it is argued that the LISA benefits only those with the means to save thereby reinforcing inequalities. Financially, some commentators feel that the LISA is too inflexible and that withdrawals should be triggered by other life-changing events such as the birth of a child. There are also concerns that LISAs could divert monies that would otherwise be invested in workplace pensions where the long-term returns are likely to be far more advantageous. On balance, Start FP feels these concerns are misplaced. Grandparents, parents and guardians wanting to help with a future house purchase should review LISAs as one the potential options open to them. Only the policyholder can make direct contributions to a LISA so any monies provided by third parties would need to come with the express instruction that they are to be paid into the LISA by the recipient.
The need for products like LISAs, however, highlights fundamental weaknesses in the British approach to long-term saving. In macro terms, there is a huge underinvestment in savings for the nation’s children. The demographic and economic changes we are living through mean that today’s children will not be able to rely on the state for support to the same extent as older generations. Today’s youngsters need as much financial help as possible, starting with being taught the basic fundamentals of budgeting and saving whilst at school.
As a society we need to wake up to the long-term consequences of our complicity in the financial ignorance of today’s youth.