Young savers

All you need to know about the new Isa

This week saw the arrival of the newest form of Isa, the “Lifetime Isa”, but savers have few options so far: only three providers offered it at launch, none of which was a bank or building society.

The new Isa allows people to save up to £4,000 a year and get a 25pc government bonus on top. For the 2017-18 tax year the bonus will be paid at the end of the year – thereafter it will be added to the account monthly.

It can be opened by savers up to the age of 40, meaning those who had already reached that age by April 6 were not eligible.

The money can be either used to buy a first home or saved until the age of 60, when it can be withdrawn without penalty. In other circumstances there is a significant exit charge.

However, just Hargreaves Lansdown, the fund shop, the Share Centre, another fund shop, and Nutmeg, an online-only advisory service, were ready to offer the Lisa on its launch day.

Other fund shops, such as AJ Bell and Fidelity, will launch at some point, although they have yet to give a date. The first cash-only version of the Lisa is expected to be available from Skipton Building Society in June.

The Isa was controversial even before it became available, with Nationwide Building Society being one provider to say it would not offer the new Isa at all because of the punitive exit charges.

If you want to take your money out before the age of 60 for any purpose other than to buy your first home, you will pay a 25pc charge on your total pot. This is intended to reclaim the government bonus, but it will also take a chunk of any interest or investment growth savers have seen in addition to some of the initial capital they contributed.

For example, a saver who puts in £4,000 in the first year will be topped up with the £1,000 Government bonus, totalling £5,000. However, if that saver then wants to redeem their money the 25pc charge will amount to £1,250 of the pot – taking £250 of their original investment.

The Share Centre’s Lisa has also been criticised for its high charges, with the fund shop offering investors a choice of just three ready-made funds on which the “ongoing” charge figure is between 2pc and 2.1pc a year.

Nutmeg charges 0.75pc a year for investors who use one of its readymade funds, while Hargreaves Lansdown charges an annual 0.45pc administration fee with fund charges on top, depending on the fund picked.

Aspiring first-time buyers who already have a Help to Buy Isa can transfer those funds into their Lisa in the 2017-18 tax year without it counting towards the £4,000 annual limit. After that it will count.

How should I invest?

For many, the Lisa will be the first time they have invested money. Olivia Wilson, 18, was one of the first Lifetime Isa investors in the country. She is opening the new Isa product in order to save for a house.

Currently living at home and taking her A-levels this year, Ms Wilson plans to go to the University of Worcester to study geography in the autumn.

She will move some of her existing savings into the newly opened Lifetime Isa and then wants to save any spare cash she has, making ad hoc contributions when she has money to spare. “The Lisa offers a good government bonus and I want to make sure I have money put aside for when I want to buy a house,” she said.

‘I want to make sure I have money put aside to buy a house’

However, like most young people, Ms Wilson has never invested before. She is not familiar with the financial markets and said she would park her money in cash while she worked out where to invest.

However, Hargreaves Lansdown, where Ms Wilson holds her Lisa, pays no interest on cash. The platform does however waive its usual 0.45pc charge if you hold money in cash rather than invest it. As Ms Wilson expects to be saving for 10-15 years, holding money in cash means she could miss out on large potential returns from the investment market.

She said she was “somewhat cautious” when it came to the risk of investing, but said she understood that the stock market offered the best longterm growth prospects and normally outperformed cash over long periods.

In the box (far right), two advisers offer tips for first-time Lisa investors.

Olivia Wilson, 18, was one of the first savers to open a Lifetime Isa when it launched this week