You may have read about them, but what exactly is a Lifetime ISA? And even if they do earn you an extra £1000 per year, are they worthwhile?
Interest levels are at an all-time low. The Government continually press us to put money away for our retirement, but when you get so little back, there isn’t a great incentive.
This is where the Lifetime ISA (or LISA) steps in. First mentioned in the budget in April 2016 by George Osbourne, the Lifetime ISA was introduced to encourage people to either save for retirement or their first home.
Who is eligible?
The Lifetime ISA is available to UK residents aged between 18-40. So if your 40th birthday is next week, open quickly!
What are the benefits?
You are allowed to save up to £4000 each year until you reach 50. For every £1 you put in, the government will give you 25p. So save your maximum £4000 annually and you will be given £1000 on top. Plus, you can receive interest on the money you save.
Another benefit is that, like an ISA, you will not have to pay any tax on your savings.
The best Lifetime ISA?
You have a choice in either placing your savings into a cash account or investing in stocks and shares. A cash account will earn you a steady amount of interest, but you won’t see great returns. Stocks and shares are riskier as you can see greater returns or potential losses. The three companies above only offered stocks and shares LISA’s.
There are fewer choices when it comes to cash LISA’s. In fact, there are only three companies offering the account at the moment is Skipton Building Society, Newcastle Building Society and Nottingham Building Society. Put your money in here and you will receive a fairly underwhelming 1% (1.1% from Newcastle BS) in interest. Just as well you’ll receive that 25% bonus then!
Here it’s easy to work out what kind of returns you can expect to receive when investing.
Nutmeg also provide a sliding scale for how risk averse you are. Choosing a 1 when you invest means you want to stay on the safe side. Alternatively, those that like to take a risk but want to see bigger returns can choose a 10. This is a good idea for new investors. However, if you want to avoid the risk aspect completely, it would be best to wait for the cash option to become available.
The money is not meant to be withdrawn until you reach 60 or want to buy your first home. If you do remove your money early, you will have to pay a 25% fee. Not bad you may think, as the bonus was 25%, so they cancel each other out. Well, not quite. Imagine you deposit £100 and you receive a £25 bonus. Withdraw that £125 early and you will lose £31.25 (25% of £125). This will leave you with £93.75. So ending your Lifetime ISA early will cost you.
The government has given one concession. If you are diagnosed with a terminal illness with less than 12 months to live, you can withdraw your money penalty-free.
Depending on your choice of LISA, you could lose money. If you choose the stocks and shares option, the value could always go down as well as up. However, with the 25% bonus given by the government, you would need to see a massive downturn in the market to lose money.
Should it replace a pension?
Generally, no. Any money placed into your pension will not be taxed first, automatically saving you 20+%. On top of this, your employer will also contribute to your pension. These factors should outweigh the 25% bonus of the LISA.
Is it worthwhile?
If you’re saving for your first house, this is a great boost for your deposit.
But, as the main source of retirement income, no. As a supplemental saving account, yes. A 25% bonus in today’s market is a great return. Plus, you should earn extra in interest. But I would not put all your savings into the LISA though. You never know when you may need money in an emergency, and you could end up losing out if you withdraw early. As a supplemental savings account, the Lifetime ISA is a no-brainer. Just make sure you open one before you reach 40.
So which is the best Lifetime ISA?
As we are in the early stages, it is difficult to tell which of these offer the best Lifetime ISA. From personal experience, Nutmeg offers the most user-friendly system. But for steady gains without any risk, look at opening your account with Skipton.