Savings super booster
ISAS are a brilliant way to save and invest because all returns are free of tax – but one under-used option goes a step further, by giving savers a 25 per cent bonus on the money they pay in, worth up to £1,000 a year.
The Lifetime Isa, or Lisa, is not open to everyone, sadly. It is targeted at first-time buyers and aims to help them build a big enough deposit to get on the property ladder.
For every £4 saved the government adds another £1. Savers can pay in up to a maximum of £4,000 a year, which would give them a £1,000 bonus.
It can only be opened by savers aged between 18 and 39, although once they have set one up, they can continue to contribute to age 50.
Someone who takes out a Lisa at age 18 and continues contributing all the way to 50 will get £32,000 of free money from the government, assuming rules stay the same.
The Lifetime Isa is part of the overall £20,000 Isa allowance, rather than on top, with all income, gains and withdrawals free of tax.
Getting on the property ladder is harder than ever due to rising house prices and mortgage rates, said AJ
Bell’s director of personal finance,
Laura Suter: “Building a big enough deposit takes time, during which prices are likely to float further out of reach.”
The Lisa can help first-time buyers “supercharge” their savings in a bid to keep up, she said.
“Investing £4,000 a year for 10 years in a Lisa gives an extra £13,000 in your savings pot compared to a standard Isa, assuming the money grows at 5 per cent a year after charges.”
If used for any purpose other than buying a first home, savers must pay a punitive 25 per cent exit penalty on withdrawals.
This is waived at age 60, so the money could be used to save for retirement instead.as with standard Isas, you have a choice of saving either in cash or stocks and shares, although provider choice is lower.
Moneybox currently pays 4.40 per cent on its lifetime cash Isa, while Tembo pays 4.30 per cent and Paragon Bank pays
3.51 per cent.
Lifetime stocks and shares Isas should deliver better returns over the longer run but with more short-term volatility.
AJ Bell, Hargreaves Lansdown, Moneybox, Nutmeg and Onefamily are some of those offering this option.
First-time buyers can use the money as a deposit on homes up to £450,000, a limit set when the scheme was launched back in April 2017.
Since then, the average house price has jumped from £219,000 to £285,000.
If the Lisa limit had climbed in line with house prices it would be worth more than £550,000 today.
The rules urgently need to be updated but Chancellor Jeremy Hunt failed to act in his recent Budget, said insurer Aegon’s head of pensions, Kate Smith: “The £450,000 cap is causing problems for first-time buyers, particularly in areas of high prices like London and the South-east.”
Lisa rules bar anyone who has ever owned a property both in the UK and overseas, even a part share of an inherited property.
Buyers cannot use the money to purchase a holiday home or buy-to-let, either.they must have opened their Lisa at least 12 months before using it to purchase a property, or lose the government bonus.
At first, investing in a lifetime Isa looks like a no-brainer. How often do you get free money from the government? Yet the complex and increasingly outdated rules are putting many off. Lisa is good, but could be better.the danger is that unless it is updated, it will only get worse.