LISA – A grand don’t come for free… Well, actually…

In this post, I’ll explore the Lifetime Investment Savings Account (LISA) which forms part of the £20,000 tax free allowance entitled to UK residents.

In his 2004 UK No.1 Album, Financial Guru (and rapper, songwriter, musician, record producer), Mike Skinner reported that “A grand don’t come for free.” This was even the title of said album. Just see for yourself.

“So I’ve failed on the DVD

Couldn’t withdraw any money

Or call mum about tea

I’ll have to get the savings and hurry

But where was the money?

I knew I’d left it on the

Side, next to the telly

This is not even funny

I left it in the living room

Ready to pick up as soon

As I passed through

On the way out to the rendezvous

So the shoebox full of money

Just disappearing from me

That’s not what I call funny

A grand don’t come for free.

https://www.youtube.com/watch?v=QIKqw-pTiJ0 – see it here for yourself.

I rated this album highly when I was younger, but times have changed. To correct Mr Skinner, a grand do come for free! It do indeed. Admittedly, you might have to wait 20, 30 or even 40+ years to see it and you’ll also have to contribute £4k to get it but it does! £1,000 in your back pocket to spend on Werther’s Originals and prunes at the ‘grand’ old age of 60.

What’s an ISA, mate?

An ISA is a tax free Individual Savings Account and in the UK we can contribute £20k per year. Whack it in Vanguard, they said. One of them there Global Trackers, they said. It’ll be little over £1,600 per month to max it out each year (which is not easy for the majority of us). The magic of compound interest will work it’s wonders and you’ll be on your way to financial freedom… They said.

So, who’s this Lisa then? She fit?

A LISA is a Lifetime Individual Savings Account and has only existed since April 2017 (under two years at the time of writing). It was introduced to encourage Millennials to save for a first house or for retirement… Or down payments on avocado toast and Starbucks debts…  As an aside… Damn Babby Boomers with their incessant need to buy stuff they can’t afford! Yeah! So, this is what a LISA is:

  • You have to be a spring chicken to open an account as they are only eligible for people between the ages of 18-40 years old
  • You can contribute £4,000 of your tax free ISA allowance into a LISA (£16k left for your Vanguard or wherever you put it)
  • The government will match 25% on a max of £4k. This turns £4k into £5k if you contribute the max allowed. This is an immediate 25% return on your initial investment. That’s mint! It’s a grand – blog article complete.
  • You can only contribute to the account until your 50 and can’t access it until your 60.
  • You can access the cash early if you want to use it to buy your first house… As long as the house is sub £450k… Yeah, ok.
  • If you want the money out before you’re 60, it’ll cost you. Accessing it early will forfeit your 25% match, the interest gained and 5% of what you’ve put in. So if it’s in, it’s there until you’re 60 or you buy your first pad. Don’t touch it!

I’m not 60 for ages, all this for a grand a year! What’s the point?

It’s the compounding. If it was really about the 1k, you’d be right. There’s not much point.  

Numbers time:

The charts below represent the maximum contribution time of £4k annually from 18-50 and then left to compound for 10 years until it can then be accessed at 60. To work out what you might be able to get out of a LISA, you need to figure out how many years away from age 50 you are – these are the years remaining that you can contribute £4,000. When you hit 50, you just have to compound with no additions. I’ll leave the interest rates up to you to play with – lots of bloggers go for 7% as this is something like what the stock market has returned on average. For these tables, I’ve used a 5% interest rate. But it’s a little a less conservative than 5% as this would include the fees taken out, too.

You might as well…

Table A – Letting it accumulate as cash in a LISA

Age Year Contribution 25% Match Balance
18 1 £4,000.00 £1,000.00 £5,000.00
19 2 £4,000.00 £1,000.00 £10,000.00
20 3 £4,000.00 £1,000.00 £15,000.00
21 4 £4,000.00 £1,000.00 £20,000.00
22 5 £4,000.00 £1,000.00 £25,000.00
23 6 £4,000.00 £1,000.00 £30,000.00
24 7 £4,000.00 £1,000.00 £35,000.00
25 8 £4,000.00 £1,000.00 £40,000.00
26 9 £4,000.00 £1,000.00 £45,000.00
27 10 £4,000.00 £1,000.00 £50,000.00
28 11 £4,000.00 £1,000.00 £55,000.00
29 12 £4,000.00 £1,000.00 £60,000.00
30 13 £4,000.00 £1,000.00 £65,000.00
31 14 £4,000.00 £1,000.00 £70,000.00
32 15 £4,000.00 £1,000.00 £75,000.00
33 16 £4,000.00 £1,000.00 £80,000.00
34 17 £4,000.00 £1,000.00 £85,000.00
35 18 £4,000.00 £1,000.00 £90,000.00
36 19 £4,000.00 £1,000.00 £95,000.00
37 20 £4,000.00 £1,000.00 £100,000.00
38 21 £4,000.00 £1,000.00 £105,000.00
39 22 £4,000.00 £1,000.00 £110,000.00
40 23 £4,000.00 £1,000.00 £115,000.00
41 24 £4,000.00 £1,000.00 £120,000.00
42 25 £4,000.00 £1,000.00 £125,000.00
43 26 £4,000.00 £1,000.00 £130,000.00
44 27 £4,000.00 £1,000.00 £135,000.00
45 28 £4,000.00 £1,000.00 £140,000.00
46 29 £4,000.00 £1,000.00 £145,000.00
47 30 £4,000.00 £1,000.00 £150,000.00
48 31 £4,000.00 £1,000.00 £155,000.00
49 32 £4,000.00 £1,000.00 £160,000.00
50 33 £4,000.00 £1,000.00 £165,000.00
51 34 £0.00 £0.00 £165,000.00
52 35 £0.00 £0.00 £165,000.00
53 36 £0.00 £0.00 £165,000.00
54 37 £0.00 £0.00 £165,000.00
55 38 £0.00 £0.00 £165,000.00
56 39 £0.00 £0.00 £165,000.00
57 40 £0.00 £0.00 £165,000.00
58 41 £0.00 £0.00 £165,000.00
59 42 £0.00 £0.00 £165,000.00
60 43 £0.00 £0.00 £165,000.00

£165,000 is pretty good, right? If you’d hidden 4k under the mattress each year from the age of 18 through 50 you’d have been left with £132,000 and a sore back, especially if you stored it in loose change. You’re essentially getting 33k for free if you invest four grand a year from age 18 and up. You could go on a pretty decent cruise with that when you’re 60. Put it all on red and you could double it. You could buy loads of overpriced coffee. The possibilities are endless.

Table B – Contributing £4k at 5% and not getting the 25% match.

Age Year Contribution 25% Match Yearly interest Total interest Balance
18 1 £4,000.00 £0.00 £110.23 £110.23 £4,110.19
19 2 £4,000.00 £0.00 £320.95 £431.18 £8,431.10
20 3 £4,000.00 £0.00 £542.47 £973.65 £12,973.53
21 4 £4,000.00 £0.00 £775.35 £1,749.00 £17,748.84
22 5 £4,000.00 £0.00 £1,020.17 £2,769.17 £22,768.97
23 6 £4,000.00 £0.00 £1,277.54 £4,046.71 £28,046.47
24 7 £4,000.00 £0.00 £1,548.10 £5,594.81 £33,594.53
25 8 £4,000.00 £0.00 £1,832.54 £7,427.35 £39,427.03
26 9 £4,000.00 £0.00 £2,131.56 £9,558.90 £45,558.54
27 10 £4,000.00 £0.00 £2,445.90 £12,004.81 £52,004.41
28 11 £4,000.00 £0.00 £2,776.37 £14,781.17 £58,780.73
29 12 £4,000.00 £0.00 £3,123.77 £17,904.94 £65,904.46
30 13 £4,000.00 £0.00 £3,488.99 £21,393.93 £73,393.41
31 14 £4,000.00 £0.00 £3,872.93 £25,266.85 £81,266.29
32 15 £4,000.00 £0.00 £4,276.55 £29,543.40 £89,542.80
33 16 £4,000.00 £0.00 £4,700.87 £34,244.27 £98,243.63
34 17 £4,000.00 £0.00 £5,146.93 £39,391.20 £107,390.52
35 18 £4,000.00 £0.00 £5,615.87 £45,007.08 £117,006.36
36 19 £4,000.00 £0.00 £6,108.85 £51,115.93 £127,115.17
37 20 £4,000.00 £0.00 £6,627.11 £57,743.04 £137,742.24
38 21 £4,000.00 £0.00 £7,171.93 £64,914.97 £148,914.13
39 22 £4,000.00 £0.00 £7,744.68 £72,659.65 £160,658.77
40 23 £4,000.00 £0.00 £8,346.80 £81,006.46 £173,005.54
41 24 £4,000.00 £0.00 £8,979.79 £89,986.25 £185,985.29
42 25 £4,000.00 £0.00 £9,645.23 £99,631.48 £199,630.48
43 26 £4,000.00 £0.00 £10,344.78 £109,976.26 £213,975.22
44 27 £4,000.00 £0.00 £11,080.20 £121,056.47 £229,055.39
45 28 £4,000.00 £0.00 £11,853.33 £132,909.79 £244,908.67
46 29 £4,000.00 £0.00 £12,666.08 £145,575.88 £261,574.72
47 30 £4,000.00 £0.00 £13,520.51 £159,096.39 £279,095.19
48 31 £4,000.00 £0.00 £14,418.74 £173,515.13 £297,513.89
49 32 £4,000.00 £0.00 £15,363.02 £188,878.15 £316,876.87
50 33 £4,000.00 £0.00 £16,355.71 £205,233.86 £337,232.54
51 34 £0.00 £0.00 £17,289.07 £17,289.07 £354,521.61
52 35 £0.00 £0.00 £18,175.44 £35,464.50 £372,697.04
53 36 £0.00 £0.00 £19,107.24 £54,571.75 £391,804.29
54 37 £0.00 £0.00 £20,086.82 £74,658.57 £411,891.11
55 38 £0.00 £0.00 £21,116.63 £95,775.20 £433,007.74
56 39 £0.00 £0.00 £22,199.22 £117,974.42 £455,206.96
57 40 £0.00 £0.00 £23,337.32 £141,311.74 £478,544.28
58 41 £0.00 £0.00 £24,533.77 £165,845.51 £503,078.05
59 42 £0.00 £0.00 £25,791.55 £191,637.06 £528,869.60
60 43 £0.00 £0.00 £27,113.82 £218,750.88 £555,983.42

Now we’re talking! £556k. Thank you very much and see you later losers. Contributing £333.33 per month (to make up the annual 4k contribution) without the 25% match leaves you with a nice chunk of money – although, I do appreciate that for lots of people, £4,000 savings per year is a hefty target. I know, I know, factoring in inflation means that £556,000 looks a much huger amount of money now than it will in 43 years. But, whatever! I wouldn’t be turning it down.

Table C – Same as table B but this time it’s with a grand we got for free.

Age Year Contribution 25% Match Yearly interest Total interest Balance
18 1 £4,000.00 £1,000.00 £137.79 £137.79 £5,137.71
19 2 £4,000.00 £1,000.00 £401.18 £538.97 £10,538.81
20 3 £4,000.00 £1,000.00 £678.09 £1,217.06 £16,216.82
21 4 £4,000.00 £1,000.00 £969.18 £2,186.24 £22,185.92
22 5 £4,000.00 £1,000.00 £1,275.20 £3,461.44 £28,461.04
23 6 £4,000.00 £1,000.00 £1,596.91 £5,058.35 £35,057.87
24 7 £4,000.00 £1,000.00 £1,935.12 £6,993.47 £41,992.91
25 8 £4,000.00 £1,000.00 £2,290.66 £9,284.13 £49,283.49
26 9 £4,000.00 £1,000.00 £2,664.43 £11,948.56 £56,947.84
27 10 £4,000.00 £1,000.00 £3,057.36 £15,005.92 £65,005.12
28 11 £4,000.00 £1,000.00 £3,470.44 £18,476.35 £73,475.47
29 12 £4,000.00 £1,000.00 £3,904.69 £22,381.04 £82,380.08
30 13 £4,000.00 £1,000.00 £4,361.21 £26,742.25 £91,741.21
31 14 £4,000.00 £1,000.00 £4,841.13 £31,583.38 £101,582.26
32 15 £4,000.00 £1,000.00 £5,345.65 £36,929.03 £111,927.83
33 16 £4,000.00 £1,000.00 £5,876.05 £42,805.08 £122,803.80
34 17 £4,000.00 £1,000.00 £6,433.63 £49,238.71 £134,237.35
35 18 £4,000.00 £1,000.00 £7,019.80 £56,258.51 £146,257.07
36 19 £4,000.00 £1,000.00 £7,636.02 £63,894.53 £158,893.01
37 20 £4,000.00 £1,000.00 £8,283.83 £72,178.36 £172,176.76
38 21 £4,000.00 £1,000.00 £8,964.86 £81,143.22 £186,141.54
39 22 £4,000.00 £1,000.00 £9,680.80 £90,824.02 £200,822.26
40 23 £4,000.00 £1,000.00 £10,433.44 £101,257.46 £216,255.62
41 24 £4,000.00 £1,000.00 £11,224.67 £112,482.13 £232,480.21
42 25 £4,000.00 £1,000.00 £12,056.47 £124,538.60 £249,536.60
43 26 £4,000.00 £1,000.00 £12,930.90 £137,469.50 £267,467.42
44 27 £4,000.00 £1,000.00 £13,850.17 £151,319.67 £286,317.51
45 28 £4,000.00 £1,000.00 £14,816.57 £166,136.24 £306,134.00
46 29 £4,000.00 £1,000.00 £15,832.51 £181,968.75 £326,966.43
47 30 £4,000.00 £1,000.00 £16,900.54 £198,869.29 £348,866.89
48 31 £4,000.00 £1,000.00 £18,023.32 £216,892.61 £371,890.13
49 32 £4,000.00 £1,000.00 £19,203.66 £236,096.27 £396,093.71
50 33 £4,000.00 £1,000.00 £20,444.52 £256,540.79 £421,538.15
51 34 £0.00 £0.00 £21,611.21 £21,611.21 £443,149.36
52 35 £0.00 £0.00 £22,719.16 £44,330.36 £465,868.51
53 36 £0.00 £0.00 £23,883.91 £68,214.28 £489,752.43
54 37 £0.00 £0.00 £25,108.38 £93,322.66 £514,860.81
55 38 £0.00 £0.00 £26,395.62 £119,718.28 £541,256.43
56 39 £0.00 £0.00 £27,748.86 £147,467.14 £569,005.29
57 40 £0.00 £0.00 £29,171.48 £176,638.62 £598,176.77
58 41 £0.00 £0.00 £30,667.03 £207,305.65 £628,843.80
59 42 £0.00 £0.00 £32,239.25 £239,544.89 £661,083.04
60 43 £0.00 £0.00 £33,892.07 £273,436.97 £694,975.12

So, there you have it. £695k. Buy the coffee shop if you want.

Let’s take a moment to reflect on the results.

Hiding it under the mattress = £132,000 and a bad back

Table A – Letting it accumulate as cash in a LISA = £165,000

Table B – 4k but no freebie = £555,983.42

Table C – 4k plus a grand for free = £694,975.12

If we compare Table A to Table C we really see the beauty of compound interest. It’s a £529,975.12 swing! Of course, none of us know what returns will be seen in future markets.

The difference between Table B and Table C is £138,991.70. That 25% match, £1,000, increases the end result by just under £139k! Bear in mind that the later you start, the smaller the final total will be.

Maybe the lyrics should be:

“So I’ve failed on the DVD

Couldn’t withdraw any money

Or call mum about tea

I’ll have to get the savings and hurry

But where was the money?

I knew I’d left it on the

Side, next to the telly

This is not even funny

I left it in the living room

Ready to pick up as soon

As I passed through

On the way out to the rendezvous

So the shoebox full of money

Just disappearing from me

That’s not what I call funny

139 grand don’t come for free

(unless at an ROI higher than 5% after fees).

You’re welcome, Mr Skinner. ; )

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