Exclusive: Investment Lifetime ISA savers warned bonus may idle in zero-return cash account
Since launch in April 2017, AJ Bell, Hargreaves Lansdown, Nutmeg and The Share Centre are the only providers offering an investment version of the Lifetime ISA (LISA) scheme for first-time homebuyers and retirement savers. Currently, there’s only one cash LISA offering from Skipton Building Society.
People aged 18-39 can open an account and save up to £4,000 each tax year into either a cash or investment version of the product and receive a government bonus of 25% each year (maximum £1,000) up until the age of 50.
In the 2017/18 tax year, the government bonus will be added at the end of the tax year, while from 2018/19, the bonus will be paid on a monthly basis, giving people even more chance to make returns.
However, the way the government bonus is added to investment LISAs vary between the four stocks and shares LISA providers, which could mean first-time buyers and retirement savers miss out on significant returns unless they actively manage their bonus payment.
AJ Bell and The Share Centre confirmed that as ISA managers, the government bonus is claimed on behalf of the saver, but is added to the cash section of their account, rather than distributed between the existing investment funds to earn returns.
This is similar to the ISA cash park where people who are looking to invest their money, but may not have decided which shares or funds to pick, can leave their money temporarily in cash on a platform.
While this means the bonus amount won’t attract any platform investment charges, as it’s sitting in cash, it also means investors won’t be benefitting from any growth in the stock market, or dividend payments.
As such, it’s vital that investors actively move their money from the cash version of the investment LISA into their existing funds, shares, trusts, etc if they want their full pot to be invested.
Here’s what the providers told YourMoney.com:
AJ Bell: Its LISA is an execution-only product (as is its existing pension, ISA and dealing accounts) so it is up to the investor to determine where and when their money is invested. Typically, it will not be a single fund, but a mix of investments. This approach is the same as tax relief on pensions.
Customers can set up a regular investment service so that cash is automatically invested each month in the funds or shares that they select. They just need to make sure they have enough cash in their account to cover it.
The Share Centre: The way its Ready-made LISA is structured, the fund sits within the LISA account – so anything paid in (including the government bonus) will sit in cash until a decision is made to invest it into the fund. The same applies to any other payment made into its LISA account.
The fee would only be charged on the bonus if the investor chooses to invest it into the fund (they have to do this proactively, otherwise it would go into the cash section of their LISA account and there will be no fund charges on that portion).
‘Many will forget about the bonus’
Martin Tilley, director of technical services at Dentons Pensions, said: “The LISA is far more like a platform based pension rather than a bespoke pension such as a SIPP where the tax relief is received in cash and has to be moved into an investment.
“It’s logical that all providers auto-invest the bonus into the existing investment funds as there’s the potential for it to get missed. I would also expect consumers to expect that the LISA government bonus would follow into the same investment strategy.
“Providers only make charges once money is received into the fund so customers aren’t charged in advance. But it’s all the more reason why it will be forgotten, not earning returns. As an example, 10% growth on £4,000 is £400, but 10% growth on £5,000, including the government bonus over the year is £500 – a £100 difference, which is a lot of money.
“Many consumers will put up to £4,000 into the investment LISA but how many will remember that they have to do something with the up to £1,000 bonus? This should set alarm bells ringing and providers must make this very clear to customers.
“They may take this cash approach to be cautious as the customer may have new instructions on where they want their money placed and are therefore acting in the interest of the client.
“The silly thing about this is that people will be comparing the cost of the investment platforms, with many deciding based on the cheapest price. They may be saving £3 or £5 on the platform costs but could be losing much more so it’s vital they check how the bonus is added to their portfolio.”
A comparison of the investment Lifetime ISA platform charges can be found by clicking on the link.
What about Hargreaves Lansdown and Nutmeg?
Here are the responses from the other two investment LISA providers:
Hargreaves Lansdown: People can choose where the LISA bonus is deposited; in most cases it will be invested in the same funds chosen for the contribution, in the same proportions.”
In Hargreaves Lansdown’s LISA information pack, it states the following: “The government bonus will be claimed by your Lifetime ISA provider from HMRC and automatically added to your account.
“For contributions made during the 2017/18 tax year, we will claim your bonus from HMRC in April 2018 and it will be paid into your account by 4 May.
“From 6 April 2018 onwards, we will claim the bonus at the earliest opportunity and you will receive the bonus by the 6th day of the following month.
“You can choose to open your HL Lifetime ISA with cash, qualify for the government bonus and then choose investments later. There’s no charge to hold cash, and no time limit on how long you can hold cash, but you won’t receive any interest.”
Nutmeg: The Government bonus gets paid into the LISA fund/portfolio at the end of the tax year. For Nutmeg customers, the bonus will be paid to the existing LISA pot, not in cash.
From its LISA information pack, it states: “Nutmeg, as your LISA manager, will automatically apply for this [bonus] on your behalf and pay the bonus directly into your LISA, so you don’t need to do anything. From April 2018, the government will pay your LISA bonus on a monthly basis. We will apply this to your account as soon as we receive it.”