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As my 40th birthday fast approaches, I have been thinking — would I trade in my relatively secure financial situation (good job, own home, OK pension, and some savings) to be 21 again?
I have fond memories of my young headbanging days, but the financial prospects for today’s 21-year-olds are depressing. Student debt, a career ladder that’s harder to climb, pensions that are far less generous and a property ladder that is seemingly impossible to get on. Middle age instantly seems more appealing.
The politicians’ answer to millennial woes has been to create a new savings product for those aged 18 to 39 — the Lifetime Isa — which will be launched on April 6, the start of the new tax year.
Aimed at helping the young save towards a property or a pension, it has an eye-catching 25 per cent bonus. Pay in the maximum £4,000 per year, and the government will give you a £1,000 top up.
The catch? You have to use the money to buy your first property (worth less than £450,000 and not a buy-to-let) or wait until you’re 60 before you can withdraw any of it without forfeiting the bonus money.
You can only open an account if you’re under 40 (I will scrape in myself by six days) but once that’s done, you can pay in — and get the generous bonus — until you’re 50. Theoretically, an 18-year-old opening a Lifetime Isa this year could receive £32,000 of “free money” if they paid in the maximum every year. But how many 18-year-olds could realistically afford to do so?
The short answer is “those with wealthy parents”. Critics of the Lifetime Isa have dubbed it a child trust fund for the middle classes. It will not help those most in need — it will reward those who already have quite a bit (much in the same way that the Help to Buy Isa — which the Lifetime Isa effectively replaces — has stoked demand for housing, but done little to increase supply).
Others fear that young people could stop saving into a (potentially much more valuable) company pension scheme to chase their home ownership dreams. This is a valid criticism, but if parents of millennials are keen to help their children save into a Lifetime Isa, they can have the best of both worlds.
I expect many readers will feel conflicted about opening an account for their offspring. As a piece of government policy, the Lisa leaves much to be desired, but the urge to provide financial security for your children is so powerful you may well be prepared to overlook this. What I’m about to say might make you feel a bit better about doing so.
First, it is a fantastic way to teach younger people about investing. Most financial pundits talk about the Lifetime Isa as if it were a savings account with 25 per cent interest. This is not true. At the time of writing, no high street banks are planning to have a Lifetime Isa product ready in time for April’s launch. Why? These are complex accounts, and the government, tax authorities and financial regulators have yet to publish the final rules about how they will work (expected to land by mid-March).
The only providers who say they will offer the Lisa from day one are investment platforms — Hargreaves Lansdown, The Share Centre, online robo adviser Nutmeg and micro-investing app Moneybox.
Other platforms — and banks — may follow suit as the tax year progresses. But “early adopters” of the Lisa will have to use their account like a stocks and shares Isa, stumping up an annual platform fee, and learning to navigate share dealing costs and fund charges as they decide what to invest in.
That’s fine if you have a long-term investment horizon, and can afford to ride out the ups and downs of the stock market. But what if you want to buy a house in three years’ time? Waiting for a cash account may be more prudent. Happily for you, a quirk of the system means you will get the full £1,000 bonus in year one, even if you invest £4,000 midway through the tax year. From April 2018, however, the bonus will be paid monthly, rewarding those who pay in a lump sum on day one.
The bonus is calculated on the money you pay in — not what your investment is worth at the end of the year (and remember — this can go up or down). Account holders will have to decide how to reinvest the bonus cash, and any dividends.
That so few Britons hold a stocks and shares Isa, compared to the vast numbers holding cash Isas paying hardly any interest, is a fact I find most puzzling. The Lisa gives parents the ideal opportunity to get their adult children on the right track for the long term, by actively involving them in DIY investing.
And this could prove a valuable skill in the future. The children of the wealthy might be in line for a “free” £1,000 a year thanks to the Lifetime Isa, but what the chancellor giveth, he also taketh away. I’m thinking here about the future of pensions tax relief.
When it comes to long-term savings, the amount that can be saved tax free into a pension is rapidly reducing. For top earners, this could already be as low as £10,000 a year. By contrast, how much of your post-tax income can be paid into an Isa is increasing — rising to a generous £20,000 a year from April (by the way, anyone with £4,000 in a Lisa can also pay another £16,000 into a conventional stocks and shares Isa).
The distraction of Article 50 may dissuade Philip Hammond from making another raid on pensions in the Budget next week — but the direction of travel is clear.