investment for DD(18)

[derelicte]

DD has about £3k in savings (from child trust fund, plus work savings and some gifts). She's starting an apprenticeship from August, and will be living at home, but earning approx £19k. She intends to put aside any of the living costs (rent, travel, food etc) that she'd have been spending if she'd moved out, and reckons this is about £1k per month.

I'm wondering if anyone has any idea what would be a good place for her savings? She's thinking of a "lifetime ISA", where she could put £4k per year, and our understanding is that she can (only) put this towards buying a home, and that the govt would top it up by 25%

Any other good ideas or considerations? She's trying to be so sensible with her money, and I don't have the knowledge to support her!

LISA and SIPP imo, so £333 a month into a LISA and the rest into a SIPP.

This would mean £5k in a LISA (with the top up) and £10k into a SIPP (£8k plus the tax relief = £10k). So £15k into accounts costing her only £12k.

If she only kept the SIPP contributions up for 5 years (so £50k SIPP) and if she invested in a low cost S&P500 index tracker and if the S&P500 behaves in the future like it has for the last 60 years (9.5% growth per annum average), then when she is 50 the SIPP will be worth £1million. That is the power of compound interest.

A low cost index tracker is the best advice for most people from the worlds top investors such as Warren Buffett (that’s his instructions to his wife when he passes).

That's really helpful @DemonSpawn , thank you!

A low cost index fund within the ISA tax wrapper, such as Vanguard LifeStrategy 60/80/100 Equity.

I'd be cautious about investing in a LISA (even though the govt tops up 25%) unless you are confident that her first property will cost less than £450,000. If she buys in London, she might exceed this and not be able to use her LISA funds which will then be stuck until she is 60 before she can access them.

www.moneysavingexpert.com/savings/lifetime-isas/

A SIPP is a pension tax wrapper and can only be accessed after your dd turns 55. Not sure why your dd would want to lock up her cash for so long as she would surely have more immediate needs for that cash at her age.

The standard caveat is speak to an IFA because it depends on your dd's financial needs such as what is she saving for and when she intends to access the funds and her risk appetite.

To clarify on the LISA, if your dd's first property costs more than £450,000, she can still withdraw from the LISA to fund the deposit but she will pay a penalty of 6.25%. This means she will have to pay the government more money than the 25% interest they paid her to withdraw the money.

www.moneysavingexpert.com/news/2023/january/lifetime-isa-change-needed-savers-locked-out/

"Savers buying a home that no longer qualifies effectively pay a 6.25% penalty to get their money out. For someone who has maxed a LISA out for five years, and has £20,000 saved (excluding £5,000 in bonuses), this would mean they need to pay £1,250. (Technically the penalty is 25% off the total amount, which includes the 25% bonus added – this works out as a net 6.25% reduction in funds excluding interest)."

SIPP, workplace pension and ISA.

Biggest consideration for the LISA is they must put to a house purchase, otherwise you lose 25% when you withdraw for any other reason.

So put in £4000 + £1000 bonus = £5,000

Withdraw for another reason you get £5,000 - 25% = only £3,750 back

ds is putting his savings into a LISA because he plans to stay in Scotland, plans to buy after uni (5 years so he will get at least 5 x £1k worth of bonuses) and his first time purchase will not be over £450k.

What is she actually saving for. If it is a house then putting it into a SIPP is pointless as she can't access until pension age. If she puts the money into funds, shares or trackers she should consider that investments are a longer term strategy and not necessarily advisable if she is investing for less than 5 years. If she wants to use the money in the next handful of years then cash isa with the best interest rate she can find.

Thanks again for the advice. DD is unlikely to buy in London/spending more than £450k on first home.

How does this plan sound?

If she's saving £1000 a month, put the max (330ish) into a LISA

another £250 into an investment ISA

Another £300ish into a regular savings account (or a cash ISA?)

A wildcard £100ish into crypto

I have various questions about the wisdom/feasibility of this. Firstly, can you invest in both a LISA and an investment ISA?

Secondly, what happens if she puts her current savings (£3k) into a LISA before the end of this tax year? Would she get any of the top-up from the govt?

Thirdly, if she was prepared to gamble £100 a month on crypto (she knows it's very high risk) would she have to pay some sort of fee for buying it each month? Would she be better off just making one purchase a year? And if she wanted to sell it all and turn it into real money (! 🤣) would she have to pay capital gains tax on any profit?

I'm hanging my head in shame at my ignorance!

Yes you can do both a Lisa and a stocks and shares ISA. Will she have access to a good workplace pension? She should start contributing to a pension as soon as she can but would be good to see what her package is as she may want to divert a bit to get the maximum employer contribution.

I personally wouldn’t do £100 a month in crypto - for me it’s too high a percentage of her money to gamble when she doesn’t have anything built up yet. getting some cash savings behind her would give security.

I’d do something like 4k LISA, 3k stock and shares ISA, 5k cash) but she has to know what her investment risk appetite is. If she isn’t prepared for losses then I’d go even higher on the cash.

Not crypto……

Pension is a very good point! The company she's has an apprenticeship apparently has a very good pension scheme.

We have a property in France if one of us dies our children automatically inherit a portion would this stop them using their LISA for a first home in the UK? Thanks

Those are incredible numbers for an 18 year old.
I wish I had put this aside for my old age.

In only 5 years she can set herself up for retirement and not think about that sipp again! And all her focus can go elsewhere

This is very interesting as my eldest is also doing an apprenticeship. Her employer has a pension scheme but there’s some rule about it not applying to ppl aged under 21 so neither her nor the employer contribute. I may suggest she looks into this again. Maybe ask your DD to look into this with her employer too as it’d be good to start a pension sooner.
My DD puts max into her LISA and I think around £5k into a S&S Vanguard life strategy isa. Neither performing brilliantly but that’s everything at the mo!

I've been investing my own money for 25+ years and if I could go back to your DD's age and do it all again, I would do exactly what @DemonSpawn said. I would focus on the SIPP + the government top-up.

The beauty of that is that she can't touch it until she's 55. Every single investor knows that time in the markets beats everything else. She can stop contributing and won't have to think about retirement in 5 years because of compound interest.

When you're that young, it's so easy to make money and live off very little, but you can never get the time in the markets back.

£100 in crypto is too much, most people say 5% of all assets could be in crypto, but only once you actually have decent assets.

@DemonSpawn If she only kept the SIPP contributions up for 5 years (so £50k SIPP) and if she invested in a low cost S&P500 index tracker and if the S&P500 behaves in the future like it has for the last 60 years (9.5% growth per annum average), then when she is 50 the SIPP will be worth £1million. That is the power of compound interest.
Is that one million in todays money so would be worth a lot less in 50 years time? I do find interest rates versus inflation mind boggling.