Is it worth bothering with Isa that pays 25% bonus if you save for a house?
MOST of us are familiar with three types of Isa: cash, stocks and shares and junior Isas. But did you know there are three other types, each with different rules and risks?
One helps the under-40s save for a home; another is for investing in lending firms; and the third is for buying the smallest stock-market shares.
It isn’t easy to work out whether these alternative Isas are right for you. So here’s a handy guide to help …
LAUNCHED almost six years ago, a Lifetime Isa can be opened by those aged 18 or over, but under 40. You can deposit up to £4,000 each tax year and earn a 25 pc government bonus up to a maximum of £1,000 a year. The £4,000
counts towards your annual £20,000 Isa allowance. You can save into one cash and one stocks and shares Isa alongside the account if you desire.
However, there are strict rules on how you can spend the money you save. You can use it to buy your first home — but this cannot cost more than £450,000. Or you can leave the pot untouched until you turn 60 (you can only contribute to it until you’re 50).
There’s a huge penalty if you break these rules. Take the money out before age 60 for anything other than a house and you’ll be whacked with a 25 pc charge. This wipes out the Government bonus
and eats into what you’ve saved. For example, on a £10,000 pot, £8,000 would have come from your own contributions and £2,000 from the Government bonus (assuming no interest or growth). A 25 pc penalty would mean losing £2,500 — so the Government bonus plus £500 of your own savings.
A handful of providers offer Lifetime Isas, but none of the big banks do. The best rate is 3.5 pc from digital firm Moneybox. You can also opt for a stocks and shares version.
VERDICT: The 25 pc bonus is attractive if you’re saving for your first house. But you must be sure you’ll use it for that — or, alternatively, you can wait until age 60 to access the funds. Otherwise, the penalty is so high that you’re better off using an ordinary Isa or a pension.
Innovative Finance Isa
THERE is a dedicated Isa for savers who want to put money in socalled peer-to-peer (P2P) lending.
The likes of Rate-Setter and Funding Circle take savings from customers and lend money to individuals or businesses.
There are some similarities with banks, but P2P firms are more loan match-makers than lenders themselves. And they don’t have the huge overheads a bank has.
The idea is that both savers and borrowers get better rates by cutting out the bank middlemen.
P2P lending has been around for more than 15 years and you’ve been able to save using a tax-free Isa wrapper since 2016.
However, uptake of Innovative Finance Isas (IF Isas) has been muted. This is partly because P2P lending is riskier than stashing money in a cash Isa. You can lose your capital if a borrower fails to pay or defaults on their loan. Plus, your savings aren’t protected by the Financial Services Compensation Scheme, which covers bank deposits up to £85,000.
Some firms offer as much as 9 pc returns — but beware, the higher the risk, the higher the rate.
Some IF Isa providers have gone bust in the past. And industry leader Zopa pulled out of peer-topeer lending altogether at the end of 2021 to focus on banking.
VERDICT: Do your homework if you’re tempted. Treat this like an investment where there’s a risk you could lose all your capital. Best for more experienced investors who are happy to experiment with a slice of their portfolio.
THIS is a specialist Isa that can hold only stocks listed on the Alternative Investment Market ( Aim). Often referred to as Britain’s ‘junior’ stock market, Aim is home to thousands of fastgrowing technology, healthcare and environmental companies. Success stories include the tonic maker Fever-Tree, package holiday seller Jet2 and video games support company Keywords Studios — each now worth more than £1 billion. You get the same £20,000 tax-free Isa allowance and the benefits of tax-free income and growth. After two years of holding the shares, you should be able to pass them on without incurring inheritance tax ( IHT). The trade- off is that Aim-listed companies are risky, with no guarantee of success; many fail.
But if you’re using Aim Isas for tax planning, the value of the portfolio will need to fall 40 pc more than other investments to cancel out the IHT benefits. You can choose your own stocks or a ready-made selection run by an Aim Isa specialist such as Octopus, via a financial adviser or broker such as Wealth Club. Beware, not all Aim companies qualify for the IHT-free benefits. VERDICT: For sophisticated investors only. Speak to a financial adviser to work out whether this type of account fits your needs.