By Emily Perryman, Daniel Coatsworth and Tom Sieber

A growing number of investment platform providers now offer Lifetime ISAs, three months after the savings and investment wrapper was launched. The latest provider to launch its service is AJ Bell Youinvest with a Stocks and Shares version.

The Lifetime ISA is an attractive savings vehicle as you can receive up to £32,000 of free money from the Government. It is designed to be used either to help buy your first house or as a retirement savings vehicle.

In this article, we will look at who might benefit from using a Lifetime ISA. We run a comparison on the different providers and products available on the market today. And we consider some funds and stocks which you may wish to put into the wrapper.

WHO IS THE LIFETIME ISA AIMED AT?

Adults under the age of 40 can open an account and pay in up to £4,000 in each tax year. The Government pays 25% bonus (i.e. up to £1,000) on these contributions annually. The bonus is paid up to the age of 50. Contributions to a Lifetime ISA fall within your annual ISA limit of £20,000.

You can withdraw money without penalty to help buy your first home worth up to £450,000 or if you are terminally ill. Otherwise the money is locked in the account until you reach age 60. Withdrawals at this stage will be tax-free.

Anyone who wants to ‘unlock’ the money before point (excluding first property purchase or critical illness) will be subject to a nasty 25% penalty charge on the value of your portfolio which includes any money you’ve made thanks to investment growth.

The free cash from the Government makes Lifetime ISAs very appealing – but they aren’t right for everyone.

They are great if you want to buy your first house or save for retirement. They aren’t necessarily the best wrapper for your savings and investments if you want to access the money for other reasons before the age of 60 due to exit penalties.

Neither is the Lifetime ISA automatically a more attractive substitute for pensions; it depends on your personal circumstances.

Anyone in full time employment should benefit from additional pension contributions from their employer which you wouldn’t get with a Lifetime ISA.

Both wrappers have Government bonus payments, albeit presented in different forms. One is tagged as a ‘bonus’, the other is ‘tax relief’ – essentially they are the same.

SAVING TO BUY YOUR FIRST HOME

You can save money into a Lifetime ISA and withdraw funds (including any Government bonus) to buy your first home at any time from 12 months after opening the account.

You won’t get any Government bonus until the money has been in the new account for at least 12 months.

The money from your Lifetime ISA to help fund a first home is paid directly to the conveyancer/solicitor, not you.

The average deposit for first time buyers in 2016 was £32,321 according to Halifax. Therefore someone who saves the maximum £4,000 each year into a Lifetime ISA and receives the Government’s bonus of £1,000 each year could end up with enough money in roughly six to seven years.

You would make £35,646 in six years if your investment portfolio grew at 5% a year. For those putting the money into cash, your savings would be worth £36,418 after seven years of investing the full amount and achieving 1% interest.

Anyone saving half the maximum amount in a Lifetime ISA (£2,000 from you; £500 from the Government) would take 10 years to reach the average deposit via the stock market at 5% annual return; and 13 years via cash at 1% annual interest.

SAVING FOR RETIREMENT

Many people will look at the bonus associated with the Lifetime ISA and assume it is more generous than a pension. It isn’t.

Basic rate taxpayers can put £4,000 into a pension and the Government will top it up with 20% tax relief to £5,000. The same £4,000 into a Lifetime ISA also becomes £5,000 thanks to the 25% Government bonus.

The 20% and 25% figures are a bit confusing; they ultimately lead to the same total figure.

The former calculation is 20% based on the total amount including the Government’s contribution. The latter is based on the amount you contribute.

A higher rate tax payer gets 40% tax relief on pensions. They put in £4,000 and the Government tops it up by £1,000 so your total inflow is £5,000. An extra £1,000 is then taken off your tax bill. That certainly beats a Lifetime Isa.

If you are a higher rate taxpayer, you will be better off with a pension until you breach the annual (£40,000 a year) and lifetime (£1m) allowances, when you become liable for nasty tax charges. At this this stage, the Lifetime ISA is a very good alternative option if you want to save further money and benefit from Government incentives.

One area to consider when weighing up the Lifetime ISA versus pensions decision is the fact that saving in the former vehicle can impact your benefit entitlement. Another factor to consider is that you can take money from your pension aged 55; you need to be 60 to start cashing in Lifetime ISA money without penalty.

Furthermore, anyone contributing to a workplace pension is likely to get additional contributions from their employer.

Indeed, under auto-enrolment all employers will eventually be required by law to match your first 3% of contributions and many will offer an even better deal. Therefore, that’s even more ‘free’ money going into your retirement savings pot.

A handful of Lifetime ISAs have been opened to the public since the product’s official launch in April, each offering a different way of investing towards your first home or retirement.

AJ Bell Youinvest, Hargreaves Lansdown, Nutmeg and The Share Centre have each launched a Stocks and Shares version of the Lifetime ISA, enabling you to invest your money in a wide range of assets. There is currently just one Cash Lifetime ISA on offer, namely the product from Skipton Building Society.

CHOOSE YOUR OWN INVESTMENTS

AJ Bell Youinvest and Hargreaves Lansdown give you the widest choice over which investments you can put in your Lifetime ISA.

The list of permitted investments is the same as for their ‘normal’ ISAs – it includes a huge range of shares, funds, investment trusts, bonds and exchange-traded funds (ETFs).

The cheaper of the two providers is AJ Bell Youinvest. The annual custody charge is 0.25%, which equates to £12.50 for an annual £5,000 LISA contribution (including the 25% government top-up). For shares, investment trusts, ETFs, gilts and bonds, there’s a maximum custody charge of £7.50 per quarter.

You’ll also need to pay dealing fees when you buy or sell investments. AJ Bell Youinvest charges £1.50 for funds and £9.95 for shares.

It’s not possible to transfer in from other ISAs at the moment, but AJ Bell Youinvest says this functionality will be added in due course.

Hargreaves Lansdown’s LISA accepts transfers in from any type of ISA, whether that’s a Help to Buy ISA, Cash ISA or Stocks and Shares ISA.

Under Government rules, you can make a one-off transfer in of funds held within a Help to Buy ISA and it won’t count towards your £4,000 LISA allowance, as long as you made the Help to Buy contributions on or before 5 April 2017.

Hargreaves Lansdown charges a custody fee of 0.45%, which is capped at £45 a year for shares (including investment trusts, ETFs, gilts and bonds). The dealing fee is £11.95 for buying and selling shares, but there’s no dealing fee for buying and selling funds.

Hargreaves Lansdown says 20,000 people have opened its LISA since it launched in April.

READY-MADE FUNDS

The Lifetime ISA offered by The Share Centre doesn’t let you choose your own investments. Instead, you pick one of three ‘ready-made’ funds: Cautious, Positive or Adventurous.

The Cautious fund is low risk and invests in income-focused investments such as Rathbone Income (GB0001229045), CF Woodford Equity Income (GB00BLRZQ620) and Gam Star Credit Opportunities (IE00B56BC491).

The Positive fund is classed as medium risk and aims for a balance of capital growth and income.

The Adventurous fund has a higher risk level and focuses on growth investments; top holdings include Legg Mason Japan Equity (GB00B8JYLC77) and Man GLG Continental European Growth (GB00B0119370).

If you want, you can choose a combination of the three funds.

There aren’t any custody or dealing charges for The Share Centre’s Lifetime ISA; you just pay the ongoing charge relating to the ready-made fund.

It costs 1.92% for the Cautious fund, 1.94% for the Positive fund and 2.01% for the Adventurous fund.

You can transfer in from any other ISA, but if you transfer out of The Share Centre’s LISA you’ll be charged £25.

FOCUS ON ETFs

Nutmeg’s Lifetime ISA is also a type of ready-made proposition but its portfolios consist entirely of ETFs. The portfolio you get will be determined by your answers to questions about your investment goals and risk preference.

At Nutmeg you can opt for either a fully managed portfolio, which the investment team alters to take advantage of opportunities and protect against potential market shocks; or a fixed allocation portfolio, which stays the same apart from some automated rebalancing.

Nutmeg’s fully managed portfolio costs 0.75% a year plus average underlying fund costs of 0.19%. The fixed allocation portfolio costs 0.45% a year and underlying fund costs are around 0.17%.

A drawback of the Nutmeg Lifetime ISA is that once you’ve opened the product you can’t pay in any additional money, even if your initial payment was lower than the £4,000 annual allowance. Nutmeg says the ability to make additional payments will be available soon.

Nutmeg doesn’t currently enable transfers in from other ISAs.

CASH ALTERNATIVE

If you want to open a Cash Lifetime ISA you’re restricted to one provider – Skipton Building Society. The interest rate is very low at 0.5% AER variable – it’s less than you could get on some Help to Buy ISAs and Cash ISAs.

Skipton says its rate is sensible and takes into account the current savings market. The only perk is that if you happen to take out a mortgage with Skipton at a later date you can get £250 cashback.

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ARE SHARES AND FUNDS TOO RISKY IF YOU ARE SAVING TO BUY A HOME IN THE NEAR FUTURE?

If you are using the Lifetime ISA to build up a deposit to buy your first home you are likely to need to access your money in the short-term.

This precludes taking too much risk with your capital as if you invested in the stock market and there was a crash you would not necessarily be in a position to wait for the market to recover.

For this reason, you may want to keep your savings in cash.

Alternatively, you could allocate at least some of your pot to a fund which prioritises capital preservation.

One option is Ruffer Investment Company (RICA). One of just a handful of funds which made money through the financial crisis, which it predicted, the main objective of the fund is to preserve capital. Nearly 40% of the portfolio is in inflation-linked bonds, 8% in cash, 5% in gold and gold equities and 41% in stocks and shares.

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Lifetime ISA - Retirement portfolio

The cut-off in terms of age for Lifetime ISA eligibility is 40. This means if you are using a Lifetime ISA as a vehicle to invest for your retirement you are likely to have plenty of time before you cash in your savings.

You could therefore consider putting at least some of your pot at work in the markets to achieve a better return than cash on deposit.

We highlight some funds, exchange-traded funds (ETFs) and stocks that you might want to consider for a long-term investment portfolio.

FUNDS

Newton Global Equity (GB00B8376K50)

This fund seeks long-term capital growth by investing in a portfolio of global stocks. It identifies themes which encompass major areas of change in the world and uses these themes as the basis of its investment ideas. The goal is to outperform the MSCI AC World Index by 2% a year.

The fund typically has 60 to 90 holdings, among them Microsoft, Apple, Citigroup, United Technologies and Japan Tobacco.

It has achieved 7.5% annualised return over the past 10 years, according to Morningstar.

Schroder Recovery (GB0007893760)

Running a concentrated portfolio of around 30 stocks, co-managers Kevin Murphy and Nick Kirrage marked 10 years at the helm in 2016.

The fund takes a contrarian approach aiming to buy when most others are keen to sell and sell when they want to buy. They work on the assumption that outright insolvency is rare and even badly hindered companies can bounce back amid improving conditions.

It has achieved 8.5% annualised return over the past 10 years, according to Morningstar.

Scottish Mortgage (SMT)

This investment trust has increased its payout for 33 consecutive years. It invests in a concentrated portfolio of the best growth opportunities around the globe – Amazon has been a big and successful holding.

The trust can also invest up to 25% in unquoted firms and has stakes in companies that have chosen not to list on a public market despite being substantial businesses. Examples include Airbnb and Spotify.

It has achieved 14.6% total annualised share price return over the past 10 years, according to Morningstar.

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ETFs

Source MSCI World UCITS ETF (MXWO)

Source MSCI World UCITS ETF is a global product which aims to track the performance of the MSCI World Total Return (Net) Index. Essentially you are getting exposure to big businesses around the world.

The index comprises 1,600 large and mid-cap stocks across 23 developed countries. It is well-diversified on a sector basis, providing exposure to the financials, IT, consumer discretionary, healthcare, industrials, consumer staples, telecoms, materials and energy sectors.

MSCI describes the index as a ‘building block’ around which investors can build a portfolio. For example, you could consider adding small cap exposure, emerging markets, specific sectors or ETFs which focus on particular stock characteristics.

It hasn’t been available long enough to show 10 year annualised data, yet Morningstar says it has achieved 15.7% annualised returns over the past five years.

iShares Ageing Population (AGED)

The average age of the global population is increasing and this issue is particularly acute in the developed world. This has all sorts of implications for the jobs market, pension provision and healthcare, alongside other areas.

This ETF is made up of companies which derive at least 50% of their revenue from areas which can be beneficiaries of this trend.

The product launched in September 2016, so performance data is limited. It is up 8.9%  year-to-date.

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STOCKS

Halma (HLMA)

This global manufacturer and supplier of health, safety and environmental equipment is an excellent example of a high-quality business that would sit well in an ISA portfolio.

Halma typically looks for strong returns from resilient growth drivers based on advances in safety regulations, ageing and urbanising populations, and other demographic trends.

Operating margins have been reliably maintained in the low-20% range for many years. There is incrementally more surplus cash to pass on to shareholders. Halma has increased the dividend by more than 5% every year since 1979.

Experian (EXPN)

One of the UK’s best businesses Experian (EXPN) is most widely known for its long-established credit services division, which provides credit checks to help lenders make better loans. It ranks number one or two in most of the markets it operates in.

Experian’s data is fundamental to the decisions of its clients on consumer credit and the price it charges is limited relative to the loan amounts at risk. Replicating its services would be extremely difficult creating high barriers to entry and it faces relatively limited competition.

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