We look at how to put a Lifetime ISA to best use
Thursday 04 Jul 2019 Author: Laura Suter

I’ve got a Lifetime ISA, which I’m using to save for a house, paying in the maximum £4,000 a year. I’m 23 and I want to buy a house by the time I’m 30. I think house prices are likely to fall, and as markets and house prices are linked I think that means I should invest in defensive funds and bonds. But house prices could rise, and stock markets could also rise, meaning I’d miss out on growth if I invest defensively?

MJ, via email

Almost 300,000 people have opened a Lifetime ISA since it launched more than two years ago, and many of these will be first-time investors. Investing can seem daunting when you first come to it, particularly if your hopes of getting your first foot on the property ladder are riding on how well your portfolio performs.

If you are not looking to buy a home for several years than you have time to ride out market highs and lows but it might be wise to keep some of the Lifetime ISA in cash. How you decide the split between cash and investments depends on your attitude to risk.

RUNNING ON A TREADMILL

Many first-time buyers worry that while they are saving for a deposit property prices will rise so much that when they’ve reached their deposit-saving goal, they will already be priced out of the market. They will then need to save for another couple of years, when they might find the same has happened – it’s like running on a treadmill and going nowhere.

MJ is wise to consider house prices and factor that into the deposit needed. However, it is notoriously tricky to accurately predict the direction of markets, whether property or stock markets. Instead MJ can use a couple of tricks to try to limit the volatility he experiences in his portfolio, which should help to protect him if markets do fall.

Regular investing involves putting a set amount into investments at regular intervals, regardless of market movements, and should help to smooth out returns.

This is what makes it a great route for first time investors who are nervous about dipping their toe into markets, as they won’t experience as wild swings and falls as lump sum investors. So if MJ were to split up the £4,000 annual contribution into £333 a month he could help to smooth things out.

DIVERSIFICATION CAN HELP

Another good option would be for MJ to ensure his assets are well diversified. This means spreading money across different asset classes and stock markets around the world, which should react differently in times of crisis or market stress. The idea is that if one area of the market experiences a fall, investors shouldn’t see all of their assets drop by the same amount.

As MJ is investing in a Lifetime ISA he will get a 25% Government bonus on any money he pays in each year – so by putting the £4,000 limit into his Lifetime ISA he’ll get £1,000 of free money from the Government.

One approach is to split the portfolio and effectively treat the Government contribution as bonus money. Investors could consider putting the maximum £4,000 into safer, more secure assets that will reduce volatility but might also underperform more racy assets, and then invest the £1,000 Government bonus in the stock market or slightly riskier assets.

One thing’s for sure, by saving £4,000 a year plus the £1,000 Government bonus over the next seven years MJ is going to have a very healthy starting pot for his house deposit.

We’ve also consulted some investment experts for their views:

Ryan Hughes, head of active portfolios at AJ Bell, comments:

‘Investors should avoid trying to predict the direction markets will move, even professional fund managers struggle to consistently time markets correctly. Instead investors should think about the risk they’re willing to take and how comfortable they are if they’re investments fell in value, even in the short term. You can find “attitude to risk” questionnaires online to help you think this through.

‘A good starting option for any first-time investor is to defer the asset allocation decisions to a professional. It is possible to buy so-called ‘all in one’ funds that spread your money between different country’s stock markets and across various asset classes.

‘A number of low-cost versions of these exist, including Vanguard LifeStrategy, costing 0.22% a year, or AJ Bell’s own similar range, costing 0.35% a year. Both of these have an option of having more or less in stock markets vs bonds, gold and cash, depending on risk appetite.

‘Starting with this broad base, which provides an allocation to investment markets across the world, it is then possible to start to allocating money to specific markets or strategies after a decent pot has been accumulated. Experts call this a “core and satellite” approach.’

Ben Yearsley, director of Shore Financial Planning, said:

‘The most important consideration is how long a person is going to invest, as that will determine the level of risk it is prudent to take. The longer the investment time-frame, the greater the level of risk can be taken.

‘In theory house prices should be correlated to rates, but they are more closely correlated with the availability of credit and that isn’t something it is possible to really hedge against.

‘Over a timeframe of more than five years investing in the UK stock market seem a sensible decision – potentially with some funds with banks and housebuilding companies in there as they are linked to prices. If it’s less than five years then the risk has to be dialled down really, and cash used predominantly. A fund such as Investec UK Special Situations (3107566) could be considered.’


DISCLAIMER: Please note, we do not provide financial advice and we are unable to comment on the suitability of readers’ investments. Individuals who are unsure about the suitability of investments should consult a suitably qualified financial adviser. With a Lifetime ISA, if you withdraw money other than to purchase your first home, or for retirement, you will pay a government withdrawal charge of 25%. This may mean you get back less from your Lifetime ISA than you paid in.

‹ Previous2019-07-04Next ›