A Lifetime Individual Savings Account or LISA is a very popular investment account in the UK.
Whether you’re using it to purchase a house or invest for retirement, it can be a great vehicle.
However, is investing in a LISA right for you, especially if you are prioritising early retirement?
If you are looking to retire early, it’s unfortunate to say that I would not invest in a LISA.
LISAs provide great benefits such as the government matching 25% of whatever you put in.
However, if you only have a certain amount of money to invest I would just invest in an ISA.
Although you’d be missing out on the contributions, at least you can access it at any time.
In this article, I talk about what a LISA is and the many advantages (and disadvantages) to it.
I then talk about what would happen if you contributed to both a LISA and ISA vs just an ISA.
By showing this comparison, hopefully you can see which option is best for your retirement.
What is a LISA?
The first thing to note is that if you’re 18-39, you can open a LISA and pay into it until age 50.
It’s a type of ISA (individual savings account), just like a Cash ISA and a Stocks & Shares ISA.
This means it falls under the £20k ISA allowance but you can only contribute up to £4k a year.
Its main selling point is that the government matches 25% of whatever you contribute to it.
That means if you contribute a maximum of £4k a year, the government will add £1k to it.
A LISA is not taxed when you withdraw from it, as its funded with money that’s been taxed.
However, unlike a Stocks & Shares ISA, unfortunately you can’t withdraw from it at any time.
You can only withdraw age 60 or if you’re planning to use it as a deposit for your first home.
That’s the one disadvantage with a LISA that makes me question whether to open one or not.
The reason being is: how would investing in a LISA impact when I could actually retire early?
How much do you need to Retire Early?
First things first: how much money in an investment account do you need to retire early?
As a reminder, the equation that you need to use to figure this out is as follows:
Target annual income x inverse of your withdrawal rate = target portfolio amount
For early retirement, let’s say you’ll be funding it using ISAs so no need to worry about taxes.
As an example, let’s say that your desired target income is £3,000 a month or £36,000 a year.
As for your withdrawal rate, let’s say that you’d be using 10% as per Portfolio Success Rates.
That means that the inverse of 10% is 1/0.1 = 10. Therefore, £36,000 x 10 = £360,000.
Therefore, you’d need £360K invested to have a non inflation adjusted income of £36K/year.
Not only that, but this money would need to be accessible at any time in order to retire early.
So the question is: is it better to invest in both a LISA & ISA or just an ISA for early retirement?
What would happen in you invested in a LISA and ISA?
So you know that you’d need early access to at least £360K invested in order to retire early.
Note: this is just until you can access your pensions, which we can calculate at a later time.
Let’s say that you have £1,000 to invest every month (outside of your pension contributions).
That equates to £12,000 a year. Let’s say you max out your LISA allowance of £4,000 a year.
That leaves you with £8,000 to invest in a S&S ISA a year, or around £667 invested a month.
Let’s use the MYB Early Retirement Calculator to see how long it would take us to reach £360k.
Making a few assumptions: starting amount of £0 and investment growth of 10% per year.
Plugging in the numbers, we can see that it would take 17 years to reach £360k in our ISA.
We can use the Early Retirement Calculator to see how much we’d have in our LISA by 60.
You need to plug £417 in contributions and your starting age to see how much you’d have.
What would happen if you invested in just an ISA?
Assuming you’re starting by age 30, you could have £905k in your LISA by the access age 60.
(This is not entirely true as you can only pay into it until age 50, but it gives you a rough idea).
This is great: after 30 years investing into a LISA, you could have almost £1 million invested.
But don’t forget about your pension, which after 30 years may also have a similar amount.
So if I didn’t have a pension, I would certainly invest in an LISA to get those gov. contributions.
Coming back to our initial £1,000 to invest every month: what if I put it all into a S&S ISA?
That means that I would be investing the full £12,000, how would this affect my calculations.
Plugging in the numbers, we can see that it would take us 14 years to reach £360k in our ISA.
As you can see, it’s not a huge difference between 14 and 17 years to reach £360k in our ISA.
It all comes down to how soon you want to be able to retire early on £36k drawdown a year,
My thoughts on LISA
As you can see, you could have a huge amount in your LISA when you come to access it.
However the same goes for your pension when you come to access it at about the same age.
That’s why for me, I would probably invest into a LISA if I was using it to buy my first home.
Doing so does not lock my money until age 60, and I could benefit from the gov contributions.
However, this only applies for your first home – no can do if you have already bought a house!
For me, I probably wouldn’t invest into a LISA if I am prioritising retiring as early as possible.
I’d rather use all my yearly private investment contributions towards investing in a S&S ISA.
As shown above, it only shaves a few years off when I could retire early: 14 years vs 17 years.
This may not seem like much for you, but for me, I’d rather retire as early as I possibly can.
For others, they may choose to wait a few extra years, but have an extra £905k by age 60!
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To find out more about early retirement, check out our articles on retirement and investing.
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