What caught my eye this week.
I would love to start here with an analogy drawn from the film Synecdoche, New York. But I fear I’m quite possibly the only person on Earth to have ever seen it.
Allegedly others have. Reviews exist on the Internet. Some rightly hail Synecdoche a work of genius. A few fools label it pretentious twaddle. But I’ve never met these critics – I even saw the film in what seemed to be an empty cinema – so I can’t rule out those reviews coming from some weirdly highbrow Russian bot farm.
Anyway, Synecdoche, New York contains multitudes, but the bit I would like to be alluding to – which I’m going to explain in words instead, which is obviously ideal in an analogy – involves the lead character’s attempt to film a story drawn from his own life by rebuilding his life – and his house, and the surrounding city – inside an enormous film set.
Which is how I found myself proceeding when I tried to write about the Lifetime ISA.
You think I’m joking?
I’m not!
Lifetime sentence
I published a piece explaining how the Lifetime ISA worked in April 2017. This long post was what remained after I hacked out a big rant about the silliness of the product – and another multi-thousand word discussion about who should make use of one.
Instead, I just gave some vague pointers, then concluded:
In the next post we’ll see exactly who the Lifetime ISA might be good for, and who should say “no thanks”, and back away slowly.
And to this day I have never finished that follow-up.
My draft is huge, contains multitudes, and is unfinished. The knowledge of it sitting there has often given me writer’s block and stalled other articles. The thought of comment after comment pointing out this or that issue if I did publish it without chasing down every last use case makes me freeze up. Instead I kick it down the road for another week or six.
Even unfinished the article wanders widely into all kinds of areas of investing – risk, time horizons, shares versus property, taxes, early retirement versus traditional pension saving, employer pension contributions – because the Lifetime ISA forces all this onto the table.
That might sound like a good read, but it is very sub-optimal. We already have a couple of million words across more than a thousand Monevator articles trying to cover all that, and there are still holes. This Lifetime ISA draft article manages to be both insanely verbose and yet still not sufficiently comprehensive to ensure nobody is misled.
Now you might be thinking:
“Okay TI, I get that the Lifetime ISA is a bit convoluted with the pension and house buying bung combo rolled into one wrapper, but I managed to figure out that I should / should not use one.”
I believe you! It’s just about possible to figure out whether an individual should open a Lifetime ISA, if you’re there with the individual.1 After two or three hour-long conversations for example I got there with my ex.2
But you really do need everything on the table to make this decision, in a way that’s not true of any other financial product I can think of. Which means that while it might have been straightforward-ish for you to decide what you should do, generalizing advice for even broad groups is very difficult.
Seriously, the Lifetime ISA is like some kind of beneficial yet malevolent magical goblet in a Greek legend. One minute it’s refilling itself with ambrosia. The next minute it’s chomped your arm off.
I believe this complexity is why even today only around half a dozen financial service providers are offering Lifetime ISAs (and only a couple the cash version). The others may fear a mis-selling scandal. Or, like me, they were hoping it would be killed off sooner rather than later.
Which brings me finally to this exciting news from Treasury Select Committee3 as reported by ThisIsMoney:
The Treasury Committee has today called for [Lifetime ISAs] to be scrapped due to their ‘perverse incentives and complexity.’
My heart just skipped a beat.
To throw out a spoiler for a film you’ll never watch, Synecdoche, New York ends on a gloomy note. The director’s project proves fatal. Don’t fire this one up for Netflix and chilling.
But could my own half-finished epic have a happier ending?
MPs might throw me a lifeline – if they can stop bickering for five minutes about when to start stockpiling prosecco – and give the Lifetime ISA the unceremonious death it deserves.
From Monevator
Our updated guide to help you find the cheapest broker for you – Monevator
From the archive-ator: Wealth preservation strategies of the rich – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!4
Household debt ‘worse than at any time on record’, reports ONS – Guardian
Trump just called off his trade war with EU. Score one for the globalists – Slate
F.I.R.V.L.? 75-year old investing legend doesn’t want to spend “the rest of my life” chasing the S&P 500 – Bloomberg
UK pensioners’ income growth outstrips wage rises, figures suggest – Guardian
MPs call for huge pensions overhaul [Search result] – FT
Warnings growing ‘down valuations’ may be a red flag for house prices – ThisIsMoney
Leasehold prisoners press government for release [Search result] – FT
Products and services
Clydesdale offering some first-time buyers loans of 5.5-times income, with just a 5% deposit – Guardian
Banks could be forced to set a minimum interest rate on savings accounts – BBC
FCA proposes changes to rules for crowdfunding platforms – FCA
Thousands of expat Barclaycard customers to have their accounts closed – ThisIsMoney
Got £1,000 spare? Ratesetter will pay you £100 [and me a cash bonus] if you invest it with them for a year – Ratesetter
The cheapest way to watch the Premier League football – ThisIsMoney
Lloyds Bank tells student using his ‘free’ overdraft for three months would cost him £1.3 BILLION – ThisIsMoney
Comment and opinion
Profiting from investment regret – Morningstar
The $20 swim – Mr Money Mustache
When bond yields throw you a curve [Canadian data but relevant] – Canadian Couch Potato
The robo-advisers aiming to help you budget for a mid-life sabbatical – Bloomberg
There’s no such thing as mosquito week – A Wealth of Common Sense
The right place at the right time – Of Dollars and Data
Passive investing is improving governance and profitability, studies show – T.E.B.I.
Three keys to retirement happiness – Vanguard Blog
How to invest a windfall [Some US-specific advice, but relevant] – Portfolio Charts
Modelling what happened if you retired just before the last big crash – Retirement Investing Today
Bethany McLean: Business gone bad and the art of persistence [Podcast] – Invest Like The Best
Swedroe: The size factor was not dead – sometimes you have to grin and bear it! – ETF.com
Are Smart Beta funds premised on faulty beliefs about investing ‘rules’? – Abnormal Returns
Five ways to measure your active investing performance – UK Value Investor
Investing biases are not natural laws. We are not all the same – Behavioral Scientist
Kindle book bargains
Einstein: His Life and Universe by Walter Isaacson – £0.99 on Kindle
Alan Sugar: What you see is what you get by Alan Sugar – £0.99 on Kindle
The Honourable Company: History of the English East India Company by John Keay – £1.99 on Kindle
Brexit
Barnier rules out key UK customs proposal – BBC
The idea we can hoard food for Brexit is just another fantasy – Guardian
British food stores ridicule Brexit stock piling plan [Search result] – FT and [snarkier] FT
The dire consequences of a No Deal Brexit [Search result] – FT
A humiliating Brexit deal risks a descent into Weimar Britain – Guardian
It’s getting hot in here…
Why is it so hot? [Video] – Guardian
Productivity plunges when temperatures soar – NPR
How does the 2018 heatwave compare to that of 1976? – BBC
Preliminary findings point to a climate change contribution, say scientists – Guardian
The science of why heatwaves are so dangerous to human health – Wired
Off our beat
Britain’s largest gold nugget found on Scottish riverbed – Guardian
Mesut Özil on the conflicts he’s endured in representing his country at football – Twitter
We Rate Dogs‘ reconciliation: Peace can break out on the Internet! – Vox
Ban fat-shaming show Insatiable, its critics cry. But none of them have seen it – Guardian
And finally…
“You can no more learn to invest through reading a book than you can read a book about heart surgery and perform a triple bypass.”
– Michael Batnick, Big Mistakes: The Best Investors and Their Worst Investments
Like these links? Subscribe to get them every Friday!
- More precisely, whether they should USE one. I’ve said anyone under the 40-year old age limit should open one with £50, simply to ensure they have the future optionality. [↩]
- Yes, I’m a thrill a minute of a boyfriend. Perhaps that’s why I am now an ex… [↩]
- Yes, I said ‘exciting’. Again, form a queue ladies. [↩]
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
Comments on this entry are closed.
I also like Synecdoche, New York a lot (it’s ten years old now).
And I won’t miss the LISA, either. Neither fish nor fowl.
Golly the FT’s going to the dogs. It begins its pensions story with “An influential government committee …” and goes on to describe the report of a non-government committee. Who do they hire these days – their own children? The Daily Mail gets the matter right.
“Clydesdale’s terms say that a deposit of just 5% is acceptable. However, it does require that the first-time buyer has an income of at least £40,000 and has recently qualified in a list of professional jobs including accountants, architects, chartered surveyors, dentists, doctors, pilots, solicitors and vets.” Architects? Does anyone at the Clydesdale know any architects?
When I wanted to give money to my 20something nephews, I wanted them to get engaged with the stock market and index trackers, and investing for the long term. I toyed with SIPPs, but decided a LISA with its break point at house purchase or pension age, and with early access possible with 6.25% penalty was the best combination of government cash and commitment. So I talked them through a index tracker LISA with HL, and hopefully it is money they will watch grow, appreciating compound returns (and their dear uncle John), and the power of equity for decades to come. As its fresh money it doesn’t impact their civil service pension or cash ISAs, but will hopefully will be a nugget to outshine them both. I’d not want the scheme stopped.
I’ve seen Synecdoche too. Though what it was about I have no idea.
So if they do scrap the LISA, what’s likely to happen to existing accounts? Would it just be closed to new accounts or would holders be unable to contribute in future years? Would they likely allow early access without penalty (perhaps *only* losing the bonus)?
Slightly surprised to see nothing in your news links regarding the possible BOE rate rise next week. Consensus seems to be that rates will go up on 2nd of August but I have my doubts because Carney hates raising rates, inflation has fallen and consumer debt is high.
I was also just considering to put the remaining 30% of my portfolio into UK inflation linked gilts this weekend. However might be too hasty considering impending rate rise and how it might affect bonds.
I confess I found the LISA decision straightforward because I am (I) under 40 (II) earning more than £150k (so get pension relief on £10kpa only and (III) have no prospect of requiring the money before I’m 65. In those circumstances, it is an easy decision to get the govt to give me free money! But I would not try to defend this as rational public policy.
I don’t understand why the LISA is being viewed in such a negative light. I for one am using it to buy my first time property. Rather than promote a savings culture, the government is propping up the housing market with the artificially inflating help to buy scheme. The rules for the LISA are straight forward of which I see it as a vehicle to aid the purchase of a first time home. As a pension savings vehicle it does not top an occupational workplace pension due to the lack of tax relief and employer contributions. The fact that there is a penalty to withdraw funds other than for a house purchase or retirement provides a strong incentive to use the funds for the intended purpose. Bottom line is that as a savings vehicle the LISA is an excellent initiative which gives a helping hand to first time buyers. The fact that only two firms offer the cash version of the LISA is a mute point as if the intention is to purchase a home, no other savings or investment product will guarantee a 25% return on deposited funds on a yearly basis. As an example I opened a LISA with Hargreaves Lansdown and kept the funds in cash collecting the full 25% bonus for the 17/18 and 18/19 tax years risk free.
The Canadian couch potato article about bond funds will be added to my gems list.
A bond fund with an average duration of 7 years won’t drop 7% if interest rates rise by 1% unless there is a ‘parallel shift’. Meaning that all 1-year, 2-year, 5-year, 10-year etc bonds will move the same way, or in other words follow a flat curve which doesn’t happen that often.
That doesn’t mean you should time the bond market when flat curves occur, but it rather gives you a better night’s sleep to know that a different duration mix provides better protection against interest rates rises.
That also explains why many funds (incl Vanguard LS) have a different mix of bonds, up to 30 years (!)
Crap, I really hope they don’t kill it off! For those of us in the public sector we’re being massively hit by AA and LTA due to the swingeing calculations used and lack of any ability to control contributions. I’ve already got a flat so wouldn’t be eligible to use it for a property purchase, but very happy to put £4k/yr away until the age of 60, this is at least 8y before I can start drawing my workplace pension. I hope they at least allow those of us that opened one to keep paying in until age 50 as promised.
On the “windfall” topic. I was lucky to have come into such an item through a business sale. I did quite a bit of reading beforehand and the best general advice I found was to do nothing. Just sit on your hands for 6 months before making any final decisions. Let all the emotions go and you will return to your prior self and invest as if nothing had changed except a few decimal places on your investment sums.
I did this and avoided all the impulses I had at the time for fast sports cars and new houses etc. I FIRE’d myself at the time and am thankful that I avoided buying millstones.
In summary boring diversified investment is the best thing for a windfall. Fast forward that freedom!
A great movie. Lucky you, seeing it on the big screen!
I love the LISA, it will hopefully bridge the gap between NHS pension and the time where I become to old to be safe to work. It is however distinctly unfair and is a government bung to the already well off.
I’m strangely pleased that some Monevator readers have seen (and appreciated!) Synecdoche, New York. It does pop up on Netflix now and then, if you’ve not. (Be warned, you may well hate it! It’s high-falutin’, and it’s not perfect. I can see why some people snap out of suspending disbelief when watching it.)
In terms of seeing it on the big screen, even that had a strangely post-modern air to it — I set out to watch it at one cinema in West London, but when I arrived I found they’d replaced it on the bill because apparently *nobody* was going to see it. So I got the tube a short distance to a smaller arty sort of cinema where — I kid you not — the film had been taken off for that morning and instead there was a local children’s ballet show being performed, with all the parents bringing their kids and making mobile phone calls and whatnot against a backdrop of Philip Seymour-Hoffman promotional posters, in my mind’s eye half-hanging out of their frames though that can’t be true.
I started thinking perhaps the film itself was some kind of post-modern joke that I hadn’t got, and that it didn’t exist. I eventually tracked it down to the Prince Charles cinema in Soho if I recall correctly.
According to Wikipedia it took just $4.7m in the Box Office, which is staggeringly and depressingly low for such a work (which I’ve only seen once, because I don’t want to dilute the impact it made on me first time, but no doubt rewards re-watching.)
Perhaps my favourite scene in the movie, which gives a taste of what it’s like, is when a young couple go to visit a house that they’re interested in buying. The wife likes it, she tells the agent, but there’s one problem, which is a fire that’s constantly raging throughout the premises. (Literally!) She says she’s afraid of it, but decides on balance to take it anyway, understanding that she may die in that house.
Perfect! But your mileage may vary. 😉
Ah Synecdoche, New York, another brilliant Kauffman film. My take is that it is roughly linked to Gödel’s Incompleteness Theorum, which is also fairly relevant to our models (whether mental or explicit) of the financial world. (While the film ends on a bit of a downer, I think that’s actually the point, which is in itself uplifting.) Throw in Quantum Uncertainty and we can never really know anything. Still the Lifetime ISA always sounded like an ill-thought through Osbourne-era gimmic.
Having already made use of a Help to Buy ISA, I’d toyed with the idea of the LISA (in addition to workplace pension and my Stocks & Shares ISA) because of the bonus money.
I held off, in part because of the lack of flexibility of investment within the LISA, but primarily because it was a politically-charged product. To work effectively it needs to be in place for decades, but depended heavily on future governments not tinkering with or scrapping it entirely.
It didn’t sound like it would last that long, but I’m a touch surprised the potential demise has come around quite so quickly!
TFE
About ‘The right place at the right time’: JD Roth has also just reviewed the betting book, about confusing outcomes and decisions: https://www.getrichslowly.org/smarter-decisions/
PS – You can add me to the I’ve-seen-Synecdoche list too.
I wouldn’t mourn the loss of the LISA. It’s just too confusing and complex.
It tries to be both a vehicle for saving for a first home and retirement. But it’s not particularly good at either. And I think we already have a big problem in the UK conflating buying homes with providing for retirement.
For a home, you better pray that you never inherit a share of a house before you get round to buying your first home. Likewise, if you live in the SE you better hope house prices slow down or you’ll never be able to use it with the £450,000 value cap (no guarantee that’ll ever be raised). Besides, is a deposit fund for a house best invested in volatile equities and bonds? Good luck finding any reasonable cash LISA offers. [p.s. the rules on house buying are very complex, tread carefully]
For retirement, the LISA is perhaps even worse. You can only open one if you’re less than 40 yo (sorry, if you’re 41 and still got 29 years till retirement). You also can’t put any money in after age 50, or withdraw without penalty before age 60. So you’ll need a lot of money saved elsewhere if you’re planning on using a LISA for retirement pre-SPA.
But the big problem is the LISA is too complex. To understand if it’s right for you, you need to know: all the complex property rules, if you’re likely to inherit property, how long you’ll work for, when you’re likely to retire, how much volatility you can handle, your life expectancy, plus, because a LISA on it’s own is not a retirement solution, you need to know all the trade-offs compared to both standard ISAs and pensions. And this is a product aimed at younger people who may not have had the life experience to get grips on personal finance.
That said if it’s right for you, the government bonus is unbeatable (unless you are a very high earner who still has carry forward for the Annual Allowance). But for me, it’s in the ‘too hard’ box.
I will add another comment in defence of the LISA. Also the comments on the daily mail/this is money article are generally supportive also so I think some balance in your view may be required. We are using it for three simple reasons, tax free in (until 50), tax free out, and no temptation to withdraw the funds. I think the only negatives are that it can be means tested in the future and is not protected in any divorce proceedings but then that is the same for the regular ISA. I do also appreciate that the average saver who doesn’t know the difference between government bonds, commodities, stocks and shares etc, may struggle to set their asset allocation for their individual purpose. This is the result of a lack of financial education in schools, not the product itself. The DM article says they are confusing. “Punishing” people who have taken the time to educate themselves about the different investment wrappers just because some are confused by it is just pandering to the lowest common denominator. Are we going to get rid of A levels because some of them are too confusing for some children? I personally am confused about how I would set up an inheritance tax avoiding trust like the duke of wherever. I haven’t a clue how a car works. Should they be scrapped?
Home bias says most capital going into a stocks and shares ISA will flow into the ftse100. From my perspective the government have basically said, “if you turn your labour into capital make that capital available to be used by British companies for growth for the next 20-30 years, then we will never tax any income that results from that portion of your labour”.
As long as you know what your signing up for the LISA is a fair deal.
@ TI –
Love the Prince Charles – the spiritual home of Japanese animated films that can only muster enough box office clout to manage two showings on one specific day.
I am not ashamed to admit that I’ve made at least one Glasgow to London trip just to visit this particular gem!
As an “expat” in Japan, Barclaycard also recently stopped my own use of the card.
I suppose it’s to be expected that as the UK turns inwards companies will gradually stop these kinds of services for the “citizens of nowhere”. It totally buggered up my iTunes Apple Music subscription and I wish them misery.
Another severing of my connections to the UK.
So one area of regular pension planning risk is tax rates tomorrow being higher than today. E. G. Merging NI and income tax. For a lower rate tax payer, esp one not using salary sacrifice, the Lisa feels like a good alternative to both pensions and ISAs.
The other group is those who have maxed out pension, they get another bite of tax relief.
Of course Lisa acts like saving so hurts means testings. Pensions are also very powerful methods to manipulate income – esp if close to an adjusted income claw back.
And on and on I could go. I see why that article never got finished :)!
Hi! As I said in the article, the issue with the LISA is not that nobody could have any use for it. For some it will clearly be very useful. It’s that many use cases are different, for some it will be very useful, others middling, for others almost dangerous, and as circumstances in your life change then previous LISA-based decisions may come back to haunt you.
You could argue that’s equally true of say pensions (e.g. You lock your money away until 55+ and then discover you need the funds for some vital life requirement) but at least pensions don’t come in with built-in contradictory draws such as saving to buy a home.
If I was making use of the LISA I’m sure I’d be sad personally to see it go, but as has previously been said on this thread that doesn’t make it a good policy tool. 🙂 It’s silly.
I like the LISA but then again I know how to benefit from it best
Don’t think we need any more fancy complications to the simple task of saving. I can’t really see LISA staying the course and when a future administration closes them the offering institutions will lose interest as the market is closed and too small for profit and withdraw or leave them orphaned and neglected. Osborne was a bit of a nuisance with his ‘clever’ ideas. Wonder who had his ear.
Really don’t get the animosity towards the LISA – could government money be better spent elsewhere? Sure, but as a product I don’t see the problem.
The LISA is a pretty simple product which is easy to understand. Pensions are much more complicated – particularly for higher rate payers – and so the difficulty derives from comparing pension contributions with the LISA because of the complexity of pensions not the LISA.
But surely, if you plan on buying a house, then a LISA is a no brainer. If not and you are employed, then probably a pension is better unless you might hit the cap (in which case, lucky you – and the government really doesnt need to worry about you viz pensions public policy). If self employed, then presumably the LISA is better because there will be no tax on withdrawal unless you are entitled to higher rate relief.
My guess is most people taking out a LISA are either planning to buy a house or are the affluent under 40s savvy enough to realize they might meet the penions cap – presumably a small minority.
Don’t see how there could be a miss-selling scandal – for that people need to be negligently misled. A bank doesn’t mislead by offering a product – sure, if they tell higher rate payers (ceteris paribus) they are better off with a LISA than a pension, but that would be the same if they tell them to save for their pension in a savings account.
Craig, I don’t want to seem like I’m picking on you, because I’m not, but the LISA is not a simple to understand product. I’ve seen lots of knowledgeable commentators say this. To them, I ask: have you read the 17-page guide to conveyancers on all the rules you need to meet on a house buy using a LISA?
There are so many rules and sub-rules. I’ve read the legislation dozens of times and there are still things I’m not sure about. Some of the rules are genuinely unclear or look like they finish mid-sentence. I might not be a brain of Britain, but I’d hope that being a Chartered Accountant, a qualified-Financial Planner and with a career in the city should be more than enough.
Another anecdotal situation in support of Lisa
Just about to turn 30, self employed (can’t be bothered with complexity of setting up pension scheme) and already have a property. Lisa is a no brainier for me. Encourages saving a decent but not unachievable amount every year and investing into a long term product. Vls 100 in my case. Ok can’t contribute after 50 but may then be time to scale down risk. Tax free lump available at 60.
Can see why they’re not suitable for everyone if they are as complex as made out to be. However surely young people would be interested in the fact a tax free lump is available at 60. Whereas are most pensions just draw down a tax efficient amount per year?
“those of us in the public sector we’re being massively hit by AA and LTA due to the swingeing calculations used and lack of any ability to control contributions.”
I’d say that, on the contrary, the treatment of DB pensions (as against DC pensions) for the LTA might almost have been designed to give a bung to people such as MPs and civil servants. On the AA point I have more sympathy. (Presumably the Treasury civil servants couldn’t think of an inconspicuous, DB-friendly wangle around that.)
“I hope they at least allow those of us that opened one to keep paying in until age 50 as promised.” I hope so too; I hate retrospective legislation.
‘On the “windfall” topic … the best general advice I found was to do nothing. Just sit on your hands for 6 months before making any final decisions.’ That’s the sort of advice I shall pass on. Perhaps someone with expensive debts could be advised to clear them quickly but sit on the remainder for six months?
“I’d say that, on the contrary, the treatment of DB pensions (as against DC pensions) for the LTA might almost have been designed to give a bung to people such as MPs and civil servants.”
Can’t comment on MPs or civil service, but it’s pretty dreadful for NHS. Pay rise of more than a £2.5k potentially triggers AA, almost impossible not to hit LTA during a normal career for doctors and these are not super-high earners compared to many with comparable qualifications – earnings around the £100k mark. Original limits when AA/LTA were brought in were OK but the drop over the years (£1.8m to 1 and £255k to 40k) have had a major impact. No control over pension accrual (either in or out of the scheme) and 15y or so of sub-inflationary pay rises (latest 0.75%) which were repeatedly said to be due to the decent pension – which employees are now facing tax charges for contributing too.
Sorry for the rant 😛
Thanks for the links, TI and sorry to hear about the ex-ing.
Fascinating article on the swr run through pre-apocalypse retirement modelling. Not sure anyone should hold (that) much vuke at all — would love to see how it looks for vwrl + agbp — a more sane pair imho.
@mathmo
Have a look over at: https://portfoliocharts.com/calculators/
Don’t think the exact same type of analysis that RIT did is available. But lots of SWR tools which you can tailor to all sorts of different portfolios. It’s an excellent resource!
Hadn’t really clocked the LISA as it came out after I left the UK and had already started disinvestment in the UK – not for any moral or Brexit related compass, just so I could get a house here and avoid the various risks of having a pension/assets in sterling and paying living costs in NZ$.
What you are all describing is very similar to something called Kiwisaver here in NZ which is pretty much the main retirement savings vehicle for many people – which gets a government bung annually of around $520 per person if you contribute at least $1042 per year. For many employees its a 3% of salary contribution with the employer adding 3% (but including said incentive). Access is at age 65 or earlier only for a first home or in dire hardship. Of course government keeps changing the rules around but is unlikely to get rid of it as its the main way most kiwi’s invest (apart from property).
Due to perceptions of risky stock markets, admittedly justified to a degree by some scandalous scams and pyramid finance companies, financial knowledge is on the low side generally although getting better – or at least in those FI(RE) communities I’m in contact with! Too many people are in conservative or default funds which invest in high levels of cash.
Charges are (to me) high with 1%+ being typical even in cash deposit funds- although that’s probably a consequence of poorly developed local markets, massive duplication of boutique investment firms and tax incentives. Oh for ISA’s and UK platforms!
Thanks again for the blog and links.
https://en.wikipedia.org/wiki/KiwiSaver
This post inspired me to take out a LISA just in case they fiddle with the pension limits as rumoured. Hopefully they let me keep it for a while.
@YoungFIGuy – I’m not quite sure what point you are making. Every transaction is complicated when viewed in a certain light – buying a packet of biscuits from Tesco’s involves lots of consumer law, food safety law and so on. Does somebody need to know the rules in the ‘guide to conveyancers’? Surely not – that’s why people use a solicitor!
The point that I understood Monevator to be making is that it is complicated whether somebody should invest in LISA – whether its a good decision for them financially. My point is that this is more a reflection of the complexity around pensions – caps, different rates of tax relief, taxation on withdrawal – than the LISA which in comparison is pretty straightforward – e.g. no special tax/charge if the pot reaches a certain amount, no tax/charge on withdrawal (if used for house/60), capped payments in, gov contribution the same for all regardless of work status/income.
@Doc – Not to say that Doctor’s shouldn’t earn that wage, but given that only 95% of the population earn <£70k a salary of £100k is high earning in any reasonable comparison. There are plenty of PHD qualified researchers out there who earn half that without anything like as good a pension scheme. However the above somewhat misses the point about defined benefits being treated better than standard pensions.
A defined benefit income of £50k per year is worth £1 million for the purposes of the LTA. A normal pension pot of £1 million would not normally be expected to provide that level of income, in fact I'd expect most people on here to estimate something £25k-£35k pa without late retirement. That means those with DB pensions can have vastly larger pension incomes without exceeding the LTA.
Thanks YFIG – that’s a good site. Certain amount of trust to be had in the calculations and data, but good tools and great visualisations. I could have gripes (time series length, fees, rebalance rules) but as long as we’re dealing in practical allocations and not academia, I think they’ll do.
SWR calcs interesting for 60/40 in UK vs 60/30/10 (hello Gold). The yellow stuff gives you an extra .5%…
I though LISAs were rather simple to understand — if you’re over 40.
@JohnG — there’s a bit of a difference between 25k in perpetuity vs 50k for life (+survivor benefits?) — you should look at annuity rates for DC retirees. But even those annuity rates probably aren’t as low as 2% for most people so your point still holds, albeit slightly weaker.
If you point is that DB are fundamentally evil contracts then I’m right behind you.
For me, the lack of any portability made LISA a non starter in contrast to a pension where QROPS exists. Also, if you are closer to 40 and on target for a £1m corpus by retirement age, LISA is nothing more than a tactical tool as the accumulated bonus is an insignificant amount.
@JohnG – reasonable points re valuation of the benefits vs a notional pot. The 16x valuation rate is probably fair in that sense given the fall in annuity rates.
I think the difficulty here is that we are dealing with a monopoly employer that *also sets the tax rules* and they have withheld pay rises (instead have made real-term pay cuts) whilst justifying this by the reasonably decent pension scheme – yet on the flipside also then heavily taxing those accruing those benefits. It’s also not just doctors affected, senior nurses are now falling subject to AA/LTA limits given how far they’ve reduced.
As there is no option to adjust pension contributions in a way that would be possible in a private sector scheme this also leads to many leaving the scheme, making it more difficult to be viable as they currently have the highest contribution rates (14.5%). The contribution rates are also tiered such that the tax relief on them is lost.
With regards comparative income – for 15-20 years of training before reaching consultant level the pay isn’t that great. Unfortunately this is why there are increasing problems with vacancies as people are either leaving the profession (a number of juniors locally have left to join management consultancy firms), retiring early or moving abroad – for example Australia pays 2-3x the salary in the public sector and much more if doing private work. In the UK there is extremely limited private work outwith London therefore no other real options except to totally change career or emigrate – both pretty wasteful for the economy given all the aforementioned training!
Sorry, I appreciate this is totally getting off track from the LISA I know but I think this is why there is such building frustration in the medical profession!
Unfortunately Craig they do need to know those rules at the outset. Because they could take out a LISA thinking they could use it to buy a house only to find they’ve fallen foul of one of a number of rules.
The point I’m trying to make is that even in the most ‘no brainer’ scenario – using a LISA to buy a first home – the situation is absolutely not straightforward.
@Investor
If you could be bothered, Syndeoche, New York could be interpreted as a parable on investing at a stretch.
Caden toils unknown for decades on a huge and intricate production of his own magnum opus that no one ever sees (akin to active investing) while Adele, the woman he’s trying win back for the first decade, becomes famous for microscopic paintings (e.g. passive investing)
Eventually Caden just gives up, hands his play over to others and just plays a small part in the continuing rehearsals for more decades before dying in an unexplained catastrophe (annuitisation).
Even Hazel’s knowing purchase of a burning house and eventual death from smoke inhalation has an investing parable (don’t buy property at the top of the market).
But, like I said, its a stretch.
Re: The LISA, even it’s thoughtful supporters here and elsewhere tend to write “the LISA has this great use, but I agree you have to look out for X and Y and Z.” If you add up everyone’s X, Y, and Z then you end up with a massive decision tree. 🙂
This is very different from a normal ISA, which as it doesn’t have steep penalties and access restrictions is very easy to recommend. The key irreversible with a standard ISA is probably missing out on employer contributions, which can be warned against. I’d agree even normal ISAs and obviously pensions have complications (e.g. tax arbitrage, bankruptcy protections of pensions compared to ISAs) but at least they don’t have big contradictions at their heart. (I can already see people saying “what about the tax-free lump sum with a pension versus an ISA” etc etc. Yes, agreed. It is still a non-trivial decision. But the LISA is that on steroids, hence my 2000+ word abandoned article!)
Generously, one can see the thought behind the dual-pronged LISA — help out young home buyers, without relatively penalizing those who choose not to buy a home but invest instead. As someone who did the latter and had to move mountains to keep up with the tax-free leveraged gains enjoyed by my property buying peers, I’m not unsympathetic to that motivation. But in practice, I still believe personally it’s too confusing and inherently contradictory.
Most savvy Monevator readers can probably figure out whether or not to use a LISA. But the average person bought PPI, runs up debts on high interest credit cards, and puts about 30 minutes thought a year into their financial planning. We might say “more fool them” but government policy shouldn’t really do the same. 🙂
@Neverland — An alternative investing lesson from Hazel’s knowing purchase of the burning house is it restates Keynes’ maxim: “In the long run we’re all dead”.
That is, we might strive to be rational economic actors at all times, but we are mortal creatures and whatever we do will move us in that direction, just in a hopefully better or worse fashion. I sort of bought my flat with intimations of mortality.
Kirsty’n’Phil’s cheery talk of a “forever home” on Location, Location is another way of saying “you’re buying the house you’ll die in.” As Hazel does, and understands she’s doing.
@Doc – don’t worry about your DB pension too much. If this committees recomendations are acted upon it is hard to see DB schemes surviving. Get ready for an even lower AA and flat tax DC style scheme. Unless of course DB schemes are somehow protected (flys in the face of egalitarian ideals they are going for).
On the salary, part of the issue is probably peers and older people. As in you earn 100k but if all you mix with are investment bankers and CEOs, it will look like chicken feed. I am envious of those who paid in 5% to get a final salary pension, earning the same (inflation adjusted) as me. One thing in doctors favour is job security. It looks, from the outside, pretty safe earning good money – slow and steady. The CEO or investment banker have potentially shorter lifespans at very high earnings. Esp if we have another financial crisis. Personally I think if the average Aus doctor is earning £300k, it suggests something is perhaps broken over there than here (bit like the vice chancellors scandal). Superstar doctors perhaps, but not your average 50 year old GP.
@Richard – thanks for the comments. Existing DB benefits are (AFAIK) protected – if they make it even worse it would further strengthen the call for increased pay. Remember from a politician’s POV they much prefer to shift liabilities to future Gov’t(!), so continuing to push the pension over pay argument probably works to their advantage.
Sadly 15% (almost) rather than 5% contributions for us – of course in years gone by many in private sector DB schemes paid those lower rates, I remember my Dad being shocked I only got an 1/80th scheme, he was in 1/60th and had contribution holidays too! Changed days now of course, although interesting to see some DB schemes being launched at about 10% contib rate. Pension age has also been pushed up in one fell swoop from 60 to 68 with no choice for members, quite a big increase in working life and something that could be tricky – coming in at 3am to carry out emergency surgery gets increasingly difficult as one gets older (from speaking to colleagues in their 50s they find it tough already compared to in their 40s, not sure how it’ll be in their 60s).
With regards pay, agree less security vs CEO/IB, although there seem to be a number in the latter category who make sufficient amounts during that short career to retire comfortably in their 40s! Being cynical if there’s another financial crisis I’d imagine there’d be another government bail-out and then years of public sector pay restraint as happened last time 😉 Don’t disagree re GPs, however for consultants their training takes about twice as long and during that period they get paid less and then have lower pay progression (only every 5 years). Sorry the Aus doctor example was in AUD so closer to £200k – this is for procedural specialties, not average GP. Again their system pays differentially more for those with longer/more specialised training, something the NHS doesn’t do.
Anyway appreciate you listening to my venting 😀
Sounds a bit like the fabled Monevator book!
Hey TI – I also saw it in London on the big screen! Superb performance by the late lamented Philip Seymour Hoffman, but by God it was hard going…
Jane
As a homeowner, the tax advantages of Lisa for retirement look sweet but it wouldn’t help me retire any earlier because my sipp is already there to cover the gap up to my occupational db pension
I think the flexibility of a regular isa, is worth more given the choice, yolo
The treasury report can be found here:
https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/565/56508.htm#_idTextAnchor055
It quotes extensively from Steve Webb former pensions minster and now director of Royal London, whose company, whilst offering a basic inhouse ISA, are best known as a traditional pension provider. They don’t offer a LISA so his views may not be totally objective. It would have been nice if they had quoted from actual providers such as H-L or AJ Bell or cash LISA providers, or indeed early users of the product and their reasons why.
I think his comments regarding the 25% loss of bonus + 6.25% penalty on LISA withdrawal should have been set against the context of the 55% loss for early unauthorised withdrawal from a pension. Far from being a disadvantage, I see the option to be used in extremis as very attractive.
Also I don’t think the uniqueness of the LISA’s tax treatment is stressed enough for basic rate tax payers. Remember a pension is tax free going in and invested but taxed on exit, giving a net tax saving of just 5% for basic rate tax payers. ISA’s are taxed going in, tax free thereafter. For a basic rate tax payer a LISA is tax-free going in, during investment and on exit.
The argument that it could persuade savers to give up auto-enrolment benefits is overstated because their value is relative low. e.g. employer is currently obliged to contribute 2% (rising to 3% April 2019) of assessed salary (which is roughly £XK – £6K)
e.g. £30K – £6k = £24K @ 2% = £480 or £720 at 3% .. for which the individual will need to contribute £1200 from April 2019.
On exit the £1200 + £720 will incur a marginal rate of 15% tax (20%-25% tax free lump sum) = £288, reducing the employers contribution value to £432
If the employee opts out and the employer instead pays £720 as salary less both employer and employee NI and tax, gives net pay of £400. Were both the £1200 less tax = £960 + £400 to be put in a Lisa the bonus of 25% adds £340, so the difference between AE and Lisa is £92 on a total contribution of almost two grand. If you are buying a first house then the extra flexibility of early access comes with very little cost.
Ideally you take AE route and then any surplus in a LISA.
Finally the other part of the report which has got little coverage is their recommendation
Para 111 -The other quoted ‘expert’ giving evidence was Baroness Altmann who states that most tax relief is poorly understand and goes on to demonstrate her own lack of understanding by stating ‘The 20% tax relief is equivalent to a 25% bonus from the Government—free money.”
On the other hand the 25% bonus on a Lisa using her own definition is very much ‘free money’.
Finally the other part of the report )para 117) which received little coverage was that the pension LTA be abolished and a lower annual allowance and flat rate allowance put in place instead. Personally I think this will only benefit those with high earnings early in their careers as most will reach peak earnings in late 40’s early 50’s and so unlikely to have had the opportunity of utilises the (lower) annual allowance in early years and then prevented being able to max out their pension contribution in later years. The solution would be to allow all un-utilised annual allowances to be carried forward rather than just 3 years as is currently the case.
LISAs also benefit those out of work who could only put £2880 into a pension and get it boosted to £3600, but has it taxed at 15% on withdrawal.
The LTA is much hated, and I’d support its removal. A lifetime government contribution limit could replace it, but I doubt the record-keeping is in place to do it retrospectively, and I expect all fear the complications of running a 2 tier scheme forward for decades.
I think tax relief at marginal rate is not fair, I’d have a flat rate at 30%, but cap the government contribution at £10k a year, with 3 year rollover.
@hoelin my bucket – I think it’s highly unlikely that an employer offering minimum auto-enrolment contributions will instead pay that contribution in salary to an employee who has opted out.
@Doc
I’m confused sorry. How does a pay rise of £2.5k in a 1/80ths scheme exceed the AA?
Pfff 2000+ word draft. I recently wrote nearly 6000 words on how to bet on horse racing 🙂
Funny thing is seems like a fair amount of people read it!
Seriously though I will probably open a Lisa just to have to option of using it, as I’m 3 years and counting (down) to 40.
Buzzing to watch Synedoche, thanks for the Recc!
@Alan apologies, quite correct, that was off the top of my head – it’s actually a bit higher than that. All depends on length of service and obviously worsened if you have purchased added years (as you accrue slightly more than 1/80th service for the year) – however under £4k of pay rise can definitely be enough to do it though, which is still a pretty small number.
For example…
Beginning PIP 37 years service, £70k salary, inflation 2%
37/80ths x £70,000 = £32,375. Uprate for inflation = £33,023
Lump sum 3x £33,023 = £99,069
End of PIP 38 years service, £74k salary, inflation 2%
38/80ths x £74,000 = £35,150
Lump sum 3x £35,150 = £105,450
Difference in final salary x valuation factor = £2,127 x 16 = £34,032
Difference in lump sum = £6,381
AA total = £40,413
Thanks @Doc.
I’m in the public sector as well, and a 5.7% pay rise, as per you example, would be nice but isn’t going to happen where I work.
No chance of that for us either when it comes to pay rise – 0.75% was out latest one – however if you combine with a promotion or incremental rise then you could definitely go above it. Nurses too – recent AfC pay rise backdated plus increment could easily do it.
For me, the LISA was a no brainer. I am very fortunate in that my parents offered to match my contributions (I’m twenty y/o), therefore effectively guaranteeing a 150% ROI.
However, I must agree with YoungFIGuy regarding the complexity around using the LISA to purchase a property. Even as someone who is fairly interested in finance and has just completed their DipFA, I’m not too sure what the qualifying rules amount to.
I hope that if it is scrapped that they at least offer us holders the chance to transfer our LISA funds (bonus n’all) into their standard ISAs. Anything else would be very unfair, imo.