The Lifetime ISA is NOT a savers’ salvation – be warned!

It’s been heralded as an innovative new way to help first-time homebuyers on to the property ladder and plug the pensions gap. Two of the biggest problems UK adults under 40 face today. Amazing. But tread carefully. The Lifetime ISA, which is available from April 6, 2017, is not all it’s cracked up to be.

LISA

Another brick in the wall

The government loves a gimmick. It particularly loves a gimmick in the shape and form of an ISA – the Individual Savings Account that gives you tax breaks.

At the turn of the century we had the Mini ISA and the Maxi ISA, later renamed to the Cash ISA and the Stocks & Shares ISA. You can save (in to a Cash ISA) or invest (in to a Stocks & Shares ISA) a certain amount each year (up to £20,000 for the tax year 2017-18) and, for the whole time you keep the money in your ISA, it’s free of capital gains tax.

Then we had the Help To Buy ISA, where you can get a 25% top-up on your savings to help you build up a deposit for your first home. We’ve also had the Junior ISA – effectively a mini Cash ISA you can open for your kids – and last year came the Innovative Finance ISA, which covers investments in peer-to-peer lending platforms, and the Flexible ISA, which is really just a set of optional add-on features surrounding transfers and withdrawals.

Got all that? Good. So let’s tell you a little more about the latest ISA off the government’s conveyor belt. The Lifetime ISA.

An ISA is for life. Or is it?

If you’re under 40 you can open a Lifetime ISA and pay in up to £4,000 a year up until your 50th birthday. The government will add an annual bonus of 25% to any amount you put in. So, for every £4,000 you save, the government will add £1,000.

You can then use these savings to buy your first home , up to the value of £450,000, or keep it in savings until you turn 60. For both options, you can withdraw your money, including the 25% government bonus, tax-free.

Sounds simple. Sounds great. And for some people it is. But don’t run to open your Lifetime ISA just yet. The terms and conditions, when examined closely, show that it is not great – or simple – for everyone.

If you need to access your money before you are 60 for any reason other than to buy your first home (costing less than £450,000) or because of terminal illness, you will pay a hefty penalty. Not only will the government reclaim the 25% bonus and any savings or investment growth on that bonus amount, it will also charge an additional 5% of the total value. So you could ed up with less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. Some taxpayers may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you will lose the benefits of the employer-matched contributions.

Oh, and you can’t buy a property and then rent it out – you must live in it. And it must be in the UK. If you already have a Help To Buy ISA you can transfer it to the Lifetime ISA or save into both, but you will only be able to use the bonus from one of them to buy your first property.

Two words. Devil and Detail.

Capital-C Conservative marketing

The Lifetime ISA is good for some but it is not the golden bullet. It is actually another headline-grabbing savings initiative, sneakily and strategically linked to two hot topics for millennials – housing and pensions – that has a lot less substance than the Chancellor would have you believe, once you’ve kicked the tyres and absorbed all the small print.

For one, the name ‘Lifetime ISA’ is curious. Why choose to label it ‘Lifetime’? It doesn’t last your entire lifetime. Is this to make us feel like it’s even bigger and better than the previous ISAs? A magic cure to all our long sufferings? Perhaps I’m being overly cynical here, but it does have a strong whiff of clumsy marketing about it, like it hasn’t been given its full consideration and due diligence.

And herein lies the source to a long and growing history of ISA problems. ISAs have always been rushed out, part of the annual Budget statement by the Chancellor each March, when they’re invariably looking for a piece of good news to announce and project into the media, to detract from the negative news – usually tax hikes, or spending cuts. The ISA has become something of a saving grace for the government in this sense. It’s a cheap trick and an easy yet flimsy get-out-of-jail card.

Tax con

The government is quick to hone in on the fact that ISAs give you generous tax breaks and ISAs are often advertised as ‘tax free’. Don’t be fooled. They’re not. You avoid capital gains tax on funds you hold in an ISA, yes, that’s true, but they’re not strictly speaking ‘tax free’. You may still have to pay tax on dividends, for example.

More importantly, we all have a separate tax allowance on capital gains from investments anyway – and from dividends! For the tax year 2017/18 those annual personal allowances – the amount you can earn before you have to pay any tax – are £11,500 on capital gains, £5,000 for share dividends and up to £1,000 on savings accounts. The vast majority of people won’t be making anywhere near £11,500 in capital gains on their ISAs in a single year. They’d need in the region of £100,000 or more in ISAs to have to worry about that. And if you’ve got that much, you’re unlikely to worry.

Shifting goalposts

There are countless other ISA rules and regulations to baffle you too and they change every year. The annual ISA allowance itself has changed most years over the past 16. At one time you could only have a Cash ISA or a Stocks & Shares ISA but now you can have both. You can now transfer your ISAs but you can’t take a Stocks & Shares ISA into a Cash ISA. If you have a Help To Buy ISA that counts as your Cash ISA for that year. ISA allowances generally run for one year, except the Help To Buy ISA which runs over multiple years.

The list of technical details and restrictions designed to confuse goes on and on and on. And all the while, the most common Google search term related to ISAs is, by a long way, ‘What is an ISA?’

The learning zone

The government has a lot of work to do on financial education. They should be less focused on repackaging gimmicks and devote more continued effort to communicating good financial habits to the public in a real, meaningful and engaging way – while cleaning up the foggy rocky landscape of financial apparatus too, of course.

To be fair, there are a number of excellent industry working groups beavering away at this right now, looking at ways to simplify common money issues for UK adults and create rules and nudges that resonate to promote better financial planning. I know because I’ve been involved in some of these projects, albeit in a small way. But these projects are so stealthy and drawn out that they’re unlikely to ever see the light of day. By the time they’re done, the ISA will have skipped ahead several more steps, or we may even have a new government in place that wants to take an entirely different direction.

One world, one vision

So how do we sort out the ISA mess we have? I’m not saying it’s easy but there are obvious changes that could be made, all in the name of simplicity. For starters, we should have just one ISA. There’s no need to have all these different flavours. The ISA and the pension can also be moulded into one. It’s just an account, a savings account, and you should get your tax relief on whatever amount you put in up to an annual limit of £50,000. You should then be allowed to use it on whatever you like, whenever you like. It’s your money after all!

Next, scrap inheritance tax. Completely. The savvy savers use these products and criteria to squirrel away their wealth and protect it as best they can while the less literate (financially speaking) are left to the dogs.

There would be budgetary details that make all this complicated behind the scenes, I’m sure, and there’s no denying it would need careful thought, but that’s what the government is there for. Guys, don’t push such complications front of house and expect us, ‘the customer’, to understand your difficulties and deal with them on your behalf. That’s your job, mate!

But I fear we’ll never have that level of common sense or support. Certainly not in my ISA lifetime! So I leave you with a final word of warning on ISAs…

Do your homework. Sadly no one is going do it for you and, despite the government’s overtones, they’re not giving you a shiny new savings present on a plate with the Lifetime ISA. In fact, it could do you damage and you might not even know it until it’s too late. BUT, if it ticks all the boxes for you and you’re sure it’s not likely to ruin your pension pot elsewhere or tug at your tax liabilities later on, then go for it – take all the help you can get.

Hey, leave our homes alone!

So the Tories are looking to scrap inheritance tax on homes worth less than £1m. While I applaud the move to culling this obscure, unfair tax for most, I find it despicable it’s still being enforced at all. I don’t care what you level of wealth you’re looking at – it’s an outdated, strange concept to me.

It shouldn’t be just property either. Why not kill tax on all forms of wealth inheritance?

familycash

Chancellor George Osborne has talked frequently of his plans to remove family homes worth up to £1m from inheritance tax which, as George says, “supports the basic human instinct to provide for your children”.

Stand and deliver

I couldn’t agree more. But why only on homes worth up to £1m? I don’t see it as something that can possibly be waived for one group and not another. It is a moral, ethical stance. You simply shouldn’t have to burden your kids with tax on anything you choose to pass on to them.

We live in an age where we are punished – or our living beneficiaries are punished – for inheriting the wealth we have worked so hard to acquire and accumulate while we’ve been alive.

You Cam talk

Prime Minister David Cameron seems to agree: “You want to know that even after you’re gone, when you’re not on the phone and not physically there, you can still provide for them. That wish to pass something on is about the most basic, human and natural instinct there is.”

But only up to a certain value, right Dave? Sorry, I don’t buy that one iota. I’m all for the fair sharing of wealth and anyone with a £1m home is no doubt pretty well off but you can’t say it’s a fundamental human right and then qualify who it will be applied to. That’s bizarre and discriminatory.

Pension chaos on the horizon

This, coupled with the new pension freedoms, is going to cause havoc. Anyone sitting on a half-decent pension pot is now broadly-speaking faced with two options:

1) Play safe and trade in your pension for a guaranteed regular income (an annuity) but know you’re unlikely to get full value from all your many years’ savings; or

2) Aim to eek out as much value as you can from your pension pot by spending it in your retirement so you don’t die sitting on a hefty chunk of cash that your family could be heavily taxed on when they inherit it.

Spend, spend, spend!

The big danger is that the majority plump for the latter. And while death and taxes are certainly the only two certainties in this world, as the old adage goes, you can never be certain WHEN you will leave this earth. I foresee a lot of people burning their pension pots dry in 20 years and then they happen to live another 20. Who’s going to pay for it? It will clog up government schemes to house and keep these people in their final years.

At the other end of the spectrum, those paying inheritance tax when their parents pass on, will not be able to sustain and pay for the millions living out those remaining years in abject poverty and utter misery.

One tax for all

It’s not a particularly cheery thought, I grant you. And there’s no easy solution. But I believe there is one way of making things much easier for people to understand, and to give everyone clearer responsibility for mapping out their finances. Have just one tax. Income tax.

Continue a graduated system of income tax, where those earning more pay more on higher amounts, and by all means increase the actual percentages, but keep it to just one tax. There’s no need for separate inheritance tax, VAT, or stamp duty when you buy a house – why on earth should you be effectively punished for that too? And there’s no need for national insurance.

As you earn your money you plan to accrue a certain amount that will see you through life and if you know anything you have left when you die will go to your offspring completely free of tax then you’ll not suffer that anxious dilemma of do I / don’t I spend the loot and get my money’s worth.

We are family: Getting back to old-school values

family2

Twenty years ago, geography and communication started to change the world in a big, big way. Everything was getting a hell of a lot quicker and faster and more expansive.

With the advent of ‘proper internet’ it was suddenly easy to work from home, operate businesses in several global locations, chat over Skype for free to your far-flung relatives and buy everything you’d ever need in life on Amazon and Ocado without ever leaving the house.

Bridge over troubled water
As a consequence, generations of families and local communities were becoming more distant, more remote. The notion of a family meal round the dinner table quickly became a 1970s hallucinogenic dream. But all that is reversing.

The importance of ‘family’ is on the rise once again. This is through necessity. Because of economic trends, virtually anyone in their 20s or 30s now has to rely on their parents for help. Help paying for their higher education. Help with the deposit on a house. Help with the kids. Help with the emotional strain of raising the next generation on a tight budget and in a demanding and transitory work environment.

Property is at the centre of all of this. The renters’ market in the UK is getting squeezed all the time, particularly in London and the big cities in the north. And young adults are struggling more than ever to get a foot on the ladder.

fam4

Outright home-owners tips the scales
I was initially startled to read that, for the first time ever, more properties in England are now owned outright than with a mortgage. There are 22.6m households in England. 7.4m are owned outright. 6.9m have a mortgage and the rest are rented.

But after some lonesome pondering on the train home it all makes sense. This is merely a reflection of the vast wealth older generations have, compared to the Millennials. It’s simply evidence that the wealth gap between generations is immense and growing all the time.

Older generations are incredibly wealthy these days because they bought when a decent property was just a few thousand pound and have since owned outright for decades as their salaries have steadily grown. Meanwhile, their offspring can only dream of earning enough to scrape together a deposit on a one-bed flat within 10 miles of their workplace.

Young, free and single?
Hence the need for families to stick together, pass on their wealth through the ages and plan and live together as one solid entity. The prospect of financial independence in your 20s, which was not too long ago an almost expected, unofficial rite of passage, is now rarely seen.

fam5

I love the thought of it, but fear the reality of it, to be honest. If all this binds together the fabric of society in a meaningful, deep, emotional way, and we truly see families and communities uniting to help and support one another through times of trouble, then great. But I suspect it’ll just led to more convoluted, resentful and complex relationships.

Why? Because at the end of the day we all want choice. We want to see our families and friends when we want. We don’t want to have to live through them or by their rules. Or feel we can’t make our own path without their say-so or on their budget.

Woman painting new home

The real cost of relocating to a new home

With property prices on the up and house-hunters in the UK’s cities struggling the most to find an affordable home, many are widening their property search to the suburbs and beyond. But while you might get more square metres for your money out in the sticks, you need to factor in the additional costs – and I’m not just talking about the inflated price of your annual season ticket for the commute to work.

Woman painting new home

We recently moved out of a cramped one-bed flat in central London to a semi-detached house in a leafy village in Surrey. The house, at £405,000, was £5,000 cheaper than the sale price we got on the flat.

I’d lived in London for 16 years and in all that time I’ve remained fiercely committed to the wonderful sights and sounds and experiences that the capital has to offer. But I also like space and fresh air and relaxation. And there comes a time when the see-saw tips and the grass is greener. So we upped and moved. The value we could get outside London finally seemed too appealing to turn down. And this was largely due to the crazy sale price we were fortunate enough to get for our modest, damp inner-city shoebox.

London’s burning

Aside from the aftermath of the financial crisis in 2008, inner-city house prices have been rampant for years. The Nationwide figures for Q4 2014 showed that the average house price in the UK stood at £186,270, a 9.7% increase on 12 months previous.

But that UK-wide figure tells only a fraction of the story. Property prices in London were up by significantly more than that. In fact, the average home across London as a whole is now over £500,000. And continuing to the end of the spectrum, the average house prices in ‘Prime London’ has soared by 11% over the last 12 months to a staggering £1.6m.

City slickers

It’s not just the capital that is the centre for such dramatic increases either. Other UK cities are following a similar pattern. Earlier this year, the Nationwide survey revealed that prices in Manchester, where the average is around £215,000, were rising at the fastest rate in the UK, even faster than London.

Luxury urban pad

The real problem is that incomes are not keeping up. Salaries have been stagnant and are only now starting to creep up again following the crash six years ago. Research by the TUC found that the average price in most London boroughs is now at least 10 times the average salary. In 1997 just over a quarter of boroughs had house prices more than five times the average local salary – but by last year every borough had exceeded that ratio.

Urban hymns

No wonder more and more people are running for the hills in search of a decent space in which to start and nurture a family. But, as I’ve recently discovered, there are additional pains and financial burdens associated with the big leap from city-buzzer to country-relaxer.

First of all, I quickly realised I now need a car. The nearest supermarket is 3 miles away. I hadn’t owned a car in 15 years and I was aghast at the cost of running it, let along buying it. Then there’s the upkeep of the property. The walls and flooring were all a bit tired but all of a sudden I was looking at refurbishment costs that were five times that of my one-bed flat. Household bills and council tax are a lot chunkier too.

newly refurbished kitchen

Then there’s the commute, of course. Previously I had the luxury of walking 20 minutes to the office. The only time I had to pay for travel was when I ventured out into Soho in the evening after work, which would happen once or twice a week. Now I pay £240 per month for my basic train fares. But it’s not just the expense of the travel; it’s the inconvenience of delays and cancellations and then the almighty challenge of ‘other people’ during rush-hour.

Time travel

I was recently involved in a survey that looked at the cost of commuting. We calculated that on average a British adult will spend over £60,000 travelling to and from work during their working life. The daily cost of commuting to and from London was an average £118 and took one hour and 14 minutes, which is more than 13,000 hours commuting in a lifetime.

The average overall was 10,634 hours over a lifetime of work, the equivalent of 443 days. Commuting to and from Liverpool cost £72 a month and took 42 minutes each day, while those in Glasgow spent £63 a month, or £35,500 in a lifetime, and spend 52 minutes travelling every day.

Train pains

Of the commuters we quizzed, a fifth of them said they did so because it was too expensive to buy or rent closer to their workplace. Then, the bug bears… The top commuting ‘hate’ was having to stand or sit next to smelly people on the tube, bus or train, according to a YouGov poll a couple of years ago, followed closely by people who cough and sneeze but fail to cover their mouth.

Crowded tube train - commuters

Women in particular are left fuming by germ spreaders. Next came people who talk loudly on their mobile phones, ahead of passengers who put their feet on the seats, eat smelly food or don’t make space in the carriage or on the bus during rush hour.

Over the hills and far away

These irksome rituals I have come to endure myself and I sometimes wonder whether it’s all worth it. Ultimately, I think it is. If I add up the number of hours spent battling the crowds every week and compare it to the amount of time I get to enjoy the finer side of countryside living, the latter wins hands down. But I do wish I’d been more vigilant in my budgeting before making the plunge.

So, the grass isn’t always greener it seems, but at least there’s more of it.