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?
The Lifetime ISA
Interest levels are at an all-time low. The Government continually presses 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 of £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.
Where can I get Lifetime ISA?
Major banks have been unwilling to commit to the LISA. In fact, at launch, there were only three companies offering the service. But slowly, a few more companies have climbed onboard.
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.
Although more providers are now onboard with LISAs, there still aren’t a great number. For a cash LISA, take a look at Moneybox, Skipton Building Society, Newcastle Building Society and Nottingham Building Society. Moneybox offers the best returns, paying interest of 1.1%.
Many people are put off by stocks and shares as they aren’t quite as simple to understand as cash options. But don’t be. Most companies offer you a breakdown of how much your account could be worth by the time you reach 60.
And don’t worry about choosing which funds to invest in either. Companies will often give you a quick quiz to see how risk-averse you are.
Nutmeg offers a simple scale of 1-10 when you open a LISA. 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, but the cash option may be better if you want to avoid all kinds of risk
Below is an example from the Nutmeg website. It shows how much you could possibly earn by making certain contributions.
Of course, there are always going to be some T&C’s attached.
The money is not meant to be withdrawn until you reach 60 or when you 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.
Another important fee to note is if you opt for a stocks and shares LISA. They will have a management fee and usually charge around 0.5-1% per year.
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. And although it shouldn’t replace a pension, remember that this money will be available to you when you reach 60.
Personally, I won’t be putting all my spare savings into a LISA though. You never know when you may need money in an emergency, and I could end up losing out if I 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?
This is really up to you. With a cash LISA, it’s simply looking for the best interest rate. Stocks and shares can be harder because you will be charged a management fee. Mine is held with Nutmeg, but that was based on ease of use.
If you don’t feel like you’re ready to commit to a Lifetime ISA, take a look at ways to make sure you save money every month.Please note, all interest rates were correct at the time of publication.