RichardContents
I recently wrote about my decision to open a Lifetime ISA. However in this article I want to discuss one of the biggest questions I had personally – whether to choose a Cash Lifetime ISA or a Stocks & Shares Lifetime ISA.
I’ll lay out my findings for you and explain what I personally opted for in the end.
Before we begin, however, I do need to make the disclaimer that all the contents of this article are my personal opinion and do not constitute financial advice. I would advise you to seek qualified guidance if you’re unsure.
What follows is a personal piece that reflects my own experiences, ideas and understandings.
Range of Providers
Despite their tempting government bonus, financial institutions seem to have been slow to offer up Lifetime ISAs. There are far fewer offerings than there are for traditional savings accounts or even standard ISAs.
Breaking this observation down even further, among those institutions that do offer Lifetime ISAs, far more offer just a cash ISA. This means it can be easy to shop around and find the best rates.
For Stocks & Shares LISAs the options are far more limited. For some people this will be frustrating.
While you may be able to open a cash LISA with your own bank, if you decide that a Stocks & Shares LISA is the best option for you then you’ll likely need to open a new account with a new financial institution. While this isn’t the end of the world, it can be a slightly annoying roadblock.
Risk Level
One of the biggest differences between Cash LISAs and S&S ISAs is the level of risk to your money.
As the name suggests, Stocks & Shares LISAs invest your money into the turbulent stock market, which can fall as well as rise. As a result, there is a chance you’ll get back less than you put in. A small chance admittedly, but still a chance.
Furthermore, the shorter the period of time your money is invested, the greater the odds of sustaining losses.
Looking at historical stock market data it seems that in the past if you’d invested for long enough you’d still have made money. But you need to be willing to weather these storms.
Cash LISAs don’t carry this same level of risk. You receive your interest each month like clockwork. Nice and safe and predictable.
In my opinion, therefore, cash LISAs are particularly suitable for people who are either very risk-averse or who will need to access their money in the near future.
If your reason for taking out a Lifetime ISA is to save for a house deposit and buy your first home then keeping your funds in cash may prove to be a smart move.
On the other hand, if you’re investing for retirement (as I am) then you may want to investigate the riskier world of Stocks & Shares LISAs. This is because your money is likely to be locked away for decades, which in my opinion can reduce the risk of short-term market trends.
Rate of Return
When it comes to savings and investments it generally follows that the safer your money is, the lower the interest you’ll earn.
Unsurprisingly Cash Lifetime ISAs tend to offer relatively low rates, sometimes comparable with instant-access savings accounts.
So why bother at all then? Well, of course, the government top-up can help to boost your savings more than if the funds were left in a bank account.
Stocks and Shares LISAs are rather different. The rate of return can and does vary. There’s less predictability. Historical figures suggest that over the long term the stock market tends to increase in value, though of course this is no guarantee of future returns.
It is – at least in theory – possible that you’d have earned more in a Cash LISA without any of the risk.
Personally I did my research and I feel that my returns on a S&S LISA are likely to be considerably more generous than a Cash LISA, as I’ll be leaving it well alone for decades to come. This compounding effect can have a significant effect on the overall closing balance. Only you (or a qualified financial advisor) can help you make a decision as to what is right for your situation.
Purpose of Your LISA
There are two main reasons to take out a Lifetime ISA. Primarily those are to help you get on the property ladder as a first-time buyer or to help fund your retirement. The key difference between these two goals is the magnitude of time.
If you’re saving for a house deposit then you may pay into your Lifetime ISA for a few years. Maybe up to a decade, but perhaps as little as just a year or two. That means your money won’t be in there too long.
In contrast, as you can only open a Lifetime ISA if you’re under 40 years of age, saving for retirement in a LISA means tying your money up for decades into the future.
The length of time that your money is tied up can have an impact on whether a Cash LISA or a S&S LISA is likely to be better.
As mentioned earlier, historical figures suggest that over the long term the stock market can offer comfortable returns.
That said, being cyclical in nature, this will likely go up and down like a rollercoaster. Short-term investing in the stock market can therefore be risky.
For first-time home buyers, I personally think that a Cash Lifetime ISA is probably the safest option.
In contrast, anyone saving into a LISA for retirement may want to at least consider a S&S option, as this could offer greater returns over the coming decades.
I hate to tap out here but I really don’t think there’s an answer to what’s “best”. After all, the best option is the one that will help you to achieve your financial goals, and these could be very different to someone elses.
The real message here is to understand the crucial differences between these two options – the risk and the potential reward – and then to make an informed decision based on your personal situation.
Personally, I opted for a Stocks & Shares ISA as part of my later-life plan.
So far I’ve been very happy with the returns and the service I’ve received, and if I’m honest I find watching those figures going up quite addictive.
I’ve set up a direct debit to pay into it each month like clockwork on pay day so everything is automated. And I’m happy to be patient and ride out any market drops.
I guess it’s only a few decades till I find out whether I made the right decision 😉
Do you have a LISA? Which did you choose and why? Please leave your thoughts, opinions and experiences in the comments section below so other readers can benefit from your insights.
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