Lifetime ISA for Musicians
The Lifetime ISA (LISA) as we know it is changing. The government is consulting this year on replacing the LISA with a new product that appears won’t have the same perks as the current LISA. Here’s my opinion on why I think every musician in the UK should have one going over the pros and cons and my personal experience after 9 years of using the product.
What is a LISA?
Introduced in 2017 the LISA sets itself apart as a unique product. It allows you to save towards either a house deposit or to access for retirement at 60. There’s a cap on contributions at £4k annually, which counts as part of your overall £20k ISA allowance, but you do receive a 25% government bonus on any contributions up to that £4k limit.
Using a LISA for a house deposit you would likely want to be saving as cash, unless you’re far out from purchasing a house, say over 5 years away, you could use stocks and then shift to cash closer to buying.
But the thing I want to talk about is using a LISA to save for retirement. Boring I know, but hear me out. For anyone who is self employed you need to be saving for the future as you don’t have an employer who’s doing that. Now the traditional way to do this is to open a SIPP (Self Invested Personal Pension) where any money you put in receives an instant 25% uplift, equivalent to getting back 20% tax relief. If you’re a higher rate tax payer then you receive 40% tax relief (or 42% here in Scotland). A SIPP can be accessed 10 years before state pension age, and follows the UK pension rules where 25% is allowed tax free and the remainder is taxed at your current tax rate at that time.
Now a LISA also offers basic tax relief on contributions up to £4k a year. To max this out you’ll need to be setting aside £333 a month which can feel quite hefty if you haven’t done this before. The absolute best part about a LISA however is when you access the money at 60 it is 100% tax free. This means later in life you could be drawing from your SIPP, ISA and LISA to give you the income you want and the only thing that is taxed is the SIPP.
LISA Rules
First we need to understand the LISA rules because it’s a quirky little product.
You need to be aged 18-39 to open one, once you are 40 you cannot open one
You can open either a cash LISA or a stocks & shares LISA
You can contribute up to £4k each year which counts as part of your overall £20k ISA allowance
You can contribute until you are 50
You can access from 60
You can withdraw money before 60, but you will lose all of the government bonus and 6.25% of your own contributions
Numbers
I opened my LISA when they first released in 2017. I had a small Help to Buy ISA I was saving into and there was a window where this could be transferred in without effecting the LISA contribution limit, which I did. My Help to Buy ISA was £1,600 when I transferred in.
Since April 2017 I have maxed out my LISA each year, this means I have made £36k of contributions over the years. The government bonus has been £9k and the great part is, just like a SIPP, that bonus goes in shortly after my own contribution which gets invested and compounds. My LISA balance is now sitting at £75k, which shows an investment return of £30k, almost matching my own contributions, helped massively by the boost from the government bonus.
My Current Returns
So we know I transferred in £1.6k from my Help to Buy ISA which also received the government bonus bringing the transfer balance to £2k. I initially paid in via lump sum but in recent years have moved to paying in monthly. If we take the total £4k that I pay in and add the government bonus of £1k we have £5k year year going into the LISA. In my calculations I am running an initial investment of £2k, monthly contributions of £416 (£5k divided by 12) and a timeline of 9 years which next month is how long I have held my LISA I have achieved around 10% returns over this time. It was closer to 11% but there has been a recent dip with the conflict in Iran.
If we include the transfer from my Help to Buy ISA, which we should have, I have paid in a total of £37.6k into my LISA . My portfolio balance is now double that at £75.5k. This was helped massively by the 25% government bonus contributing £9.4k to my portfolio, which has also compounded with time in the market.
Current Portfolio
The Strategy
If you research the LISA on reddit, forums or even YouTube videos you’ll see some mixed options. Many people say they’re great for basic rate tax payers, but not worth it for higher rate tax payers. While this is true, remember we have a progressive tax system in the UK, meaning you get your tax free allowance, then an amount is taxed at basic rate, and if you’re a higher earned only the higher rate earning are taxed at that rate. So what I do is before the tax year ends I make sure I’ve got my books in order, and I try to use expenses and SIPP contributions to take me out of the higher tax rate. This is a win in a few ways, most important is;
I’m never paying 42% tax on any of my earnings
I get 42% tax relief on most of my SIPP contributions, a massive boost
Any expenses I claim for equipment and gear are essentially receiving a 42% discount
My LISA contributions have been taxed at basic rate
Providers
I initially opened my LISA with Hargreaves Lansdown since there were only a handful of options at the time. There are a few more providers now, and fees have thankfully lowered. I believe my HL fee was a hefty 0.45% when I started. In 2020 I moved over to EQi as my provider, which I rarely hear anyone talk about. All the other providers have percentage based fees and while on the surface it looks like EQi also do this, their fees are 0.2% but the magic is they are capped at just £10 a quarter or £40 a year. I have this fee come from my bank account so every 3 months they take £10. This doesn’t eat into the growth of my portfolio and it’s so small I never miss it. There are some roboadviser platforms but ideally you want to take full control with a proper DIY provider.
I’m in no way sponsored but what I also like about EQi is there are no fees to buy a fund, they just recently lowered their fees to sell a fund (which ideally I only do once), they offer regular contributions and regular investing so you can automate everything and just forget about it. Their website and app are both pretty dated, but they get the job done and I’m willing to put up with that to save on fees.
One last thing about platform fees, don’t get too hung up on them at the beginning. For the EQi cap of £40 a year to work out better than 0.2% a year you need to have a portfolio of £20k or above. HL and AJ Bell both now charge 0.25% on funds so there’s a few options, but I do believe EQi to be the lowest fee once you hit a portfolio of £20k or higher.
The Portfolio
My portfolio is all in a single fund, the Vanguard FTSE Global All Cap index fund. This aligns with my investment goals as best as a single fund can, including both developed and developing markets, including small caps which many ETFs don’t, it contains over 7,000 stocks and it keeps things simple with a single fund. New funds may come along, and I am interested in the Vanguard Global All Cap ETF that will be launching soon, but for now I’m happy with this fund and it’s relatively inexpensive 0.23% ongoing charge.
Future Projections
As I continue to max out my LISA each year until I’m 50, I have 18 more years to contribute. That works out to £72k of my own contributions and £18k of the government bonus.
I we use a compound interest calculator, and assume 7% growth over that time which is achievable via the stock market, the balance when I am 50 could be around £430k. Now remember, you can’t access the money at 50 but you also can’t contribute any more. So say the portfolio is still invested in the same way and continues growing for a further 10 years at 7% until I can access it at 60, it would then be worth about £845k. That is the absolute magic of compounding at work here, no further contributions but the pot has almost doubled in 10 years by just remaining invested.
If markets perform slightly higher at an averaged 8% return then at 50 I’d have £495k and at 60 it would be over £1 million.
Projected Portfolio at 50
Projected Portfolio at 60
Tax Free
The absolute beauty and simplicity of the LISA is that once you hit 60 the entire pot is accessible tax free. This is much more appealing than a pension in a SIPP as only 25% of a SIPP is tax free. Yes the LISA has some strange age restricted rules and withdrawal penalties, but this final stage gives you so much flexibility in later life. Pension rules change over time, and they are also now starting to mess with the LISA so nothing is set in stone. However, if you are in the right age bracket to open a LISA, I suggest you do so now before the new LISA rules come into play which will not work in the same way the product currently does. HMRC have stated that the current rules will continue for anyone who opened a LISA under these rules, and remember you can open one with just £1. So even if you’re not in a position right now to invest, there’s no harm in opening one and locking in with the current rules hopefully until you can access it at 60.
