Five savings strategies for those serious about getting on the housing ladder.
The start of a new year often brings with it resolutions and promises to yourself of all the opportunities you wish to fulfil in the year ahead. Aside from the usual diets, exercise, dry January (be that dry white wine, dry gin, dry martini or the more mundane version of abstinence) one resolution for many will be to get on the housing ladder, an increasingly difficult feat some may think.
Rents are rising at the fastest pace in 13 years, according to Zoopla, with an average increase of 4.6% in the twelve months to September 2021. Outside London, rents were up by 6% marking a 14-year high. Demand is outstripping supply and this is driving up prices. This is clearly motivation to start thinking seriously about how you can get out of the rental trap.
But where to start? When it comes to saving, there are some excellent tax-efficient opportunities to grow your pot, you just need to know where to look.
Cash Deposits - If you kept £10,000 in cash at current levels with bank base rate at 0.25%, inflation, is a real worry. On searching today (13/1/22) the best cash saver rates that could be found were:
|Account Type||Interest Rate|
In terms of inflation over the long-term, results from the Bank of England inflation calculator shows, it averaged 2.7% over the last 10 years. Turning to where we are now, data from the Office for National Statistics confirms the Consumer Prices Index (CPI) rose by 5.1% in the 12 months to November 2021, while the Guardian recently reported US inflation at 7% and that it is rising at a rate unseen in decades.
If you put £10,000 in a cash deposit account for ten years, with an annual rate of interest of 0.67%, you would earn £690.57 in interest. But allowing for inflation of 2.7% per annum, the value of those savings in real terms would be £8,190.23. A scary thought indeed and a picture that could be worse still if the current inflation picture does not ease.
Stocks and shares ISA – The annual ISA allowance is £20,000 and offers tax-free interest and growth, so no capital gains tax to pay when you sell down to pay for the house deposit, and no income tax to pay either.
If you invested £10,000 in a Stocks & Shares ISA and achieved an annual return of 5%, your capital return over 10 years would be £6,288.95. Once again adjusting that for inflation, based on that average figure of 2.7%, would result in a total value of £12,479.25 in real terms. A return of 5% is equivalent to the average annual return of a Church House investment portfolio, designed to deliver capital preservation and low volatility, over the last 10 years, net of investment fund fees. Please note, to invest in this portfolio other fees apply.
If you are prepared and able to accept a greater level of risk, you may experience a higher level of return although this cannot be guaranteed. Indeed, historic investment performance may not be a reliable guide to future performance and any invested capital would be at risk.
Lifetime ISA (cash or stocks and shares) - A LISA can be opened by anyone who is a UK resident aged between 18 and 39. You can save up to £4,000 a year into it, towards your first home or retirement. The UK Government then adds a cash bonus of up to £1,000 a year on top (25% bonus on what you add).
The maximum bonus is £33,000 if you open your LISA at age 18 and max it out until you hit 50 (unless you're born on 6 April, when the max is £32,000). Do note, however, you can only use it on the purchase of a first property valued at £450,000 or less. You do get access to the cash in time for exchange. You will pay a penalty of 25% if you withdraw cash from your LISA for anything other than your first home or retirement so it is best to only invest in a LISA if you are SURE that the cash is for your first time home purchase or retirement.
At first glance, the fact you've had a 25% bonus added and then a 25% penalty would seem to leave you back where you started. However, it is important to think more carefully about this.
Imagine you saved £1,000 by April 2021 and so got a £250 bonus (due in May). So, you'll have £1,250 total (ignoring interest, for ease). If you withdrew it in June, and closed the account, the 25% penalty would be £312.50. So, you'd get £937.50 back. In effect, the maths means that withdrawing for reasons other than buying your first home or retirement loses you 6.25% of what you contributed.
Other options, such as Self Invested Personal Pensions (SIPPs), which offer tax-relief on contributions, may be more suitable for retirement saving but this will depend on your individual circumstances. They can currently be accessed a bit earlier than the LISA – at 57 versus 60, plus you can continue contributing after 50, and once you start paying tax in the UK, you can contribute up to £40k per year gross and potentially reclaim up to 45% tax back.
Using both LISA & ISA - You have a total annual ISA allowance of £20,000, so you could add £4,000. to the LISA to get the £1,000 bonus back from the Government, equivalent to a 25% return, before any growth and add your remaining ISA allowance of £16,000 to a Stocks and Shares or Cash ISA. This enables you to use your whole ISA allowance and ensures you receive the maximum Government bonus.
Help to Buy ISAs - have now closed to new applicants, however, if you have one, please note that you can only use the bonuses from either LISA or Help to Buy ISA towards your first home. In other words, you would use the Help to Buy ISA for your property purchase and keep the LISA for retirement.
With the interest rates expected to remain historically low and inflation seemingly on the rise, it is more important than ever to be disciplined with your saving and to make sure that you get your cash working as hard as possible.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.