Be­ware pit­falls of the Life­time Isa

As Help-to-Buy Isa closes, ex­perts warn about the al­ter­na­tive...

Scottish Daily Mail - - Moneymail - By Sylvia Mor­ris and Fiona Parker

BRI­TAIN’S big­gest build­ing so­ci­ety was hit with a bar­rage of 300,000 ap­pli­ca­tions for Help-to-Buy Isas last week.

Na­tion­wide opened 43pc of the 700,000 ac­counts it has on its books in the fi­nal week be­fore its Isa was taken off the mar­ket on Satur­day.

San­tander, Lloyds, HSBC and Vir­gin Money also saw an up­lift in ap­pli­ca­tions. There is now just one sav­ings scheme of­fer­ing first-time home­buy­ers a lu­cra­tive tax-free bonus: the Life­time Isa, or ‘Lisa’.

So far, the deal has failed to prove all that pop­u­lar with hope­ful home­own­ers. But af­ter the Help-to-Buy Isa closed to new savers, banks and build­ing so­ci­eties are brac­ing them­selves for a jump in ap­pli­ca­tions. Yet just 14 of around 500 Isa providers of­fer the plan.

Many are con­cerned about the ac­count’s pun­ish­ing exit fees, which saw young savers lose more than £1 mil­lion in just two years af­ter cash­ing in early. In­sid­ers say they fear fac­ing mis-sell­ing charges be­cause the Lisa is so com­pli­cated. One of the big­gest prob­lems is that it mud­dles sav­ing for a de­posit for a first home with longer-term re­tire­ment needs. The Lisa was launched in April 2017 to help peo­ple save for their first home and later life. Plans are open to any­one aged 18 to 39 and you can save up to £4,000 a year un­til you are 50.

On top of this you earn an an­nual 25pc bonus if you use the sav­ings as a de­posit for your first home (worth no more than £450,000) or for re­tire­ment at 60. So if you save the max­i­mum £128,000 over 32 years you will re­ceive an ex­tra £32,000.

But if you use your sav­ings for any­thing other than a first home or re­tire­ment you face a hefty 25 pc exit fee — which can leave you with less than you put in. For ex­am­ple, if you take out £1,250 — £1,000 plus the £250 bonus — you will end up with £937.50 af­ter the £312.50 exit fee. This means you have ef­fec­tively lost the en­tire £250 Govern­ment bonus and £62.50 (6.25 pc) of your own money.

An as­ton­ish­ing 1,500 savers paid an av­er­age of £695 to the tax­man as pun­ish­ment for with­draw­ing money be­tween April 2017 and April 2019 — a to­tal of £1.05 mil­lion.

For­mer pen­sions min­is­ter Baroness (Ros) Alt­mann says: ‘It is wrong to con­fuse pen­sions and house pur­chase and it dam­ages the Isa brand to add un­nec­es­sary com­plex­ity to what be­gan as a sim­ple sav­ings prod­uct.

‘I fear the Life­time Isa is a dan­ger­ous prod­uct if used for re­tire­ment sav­ings un­less some­one has had proper ad­vice to make sure it is suit­able for them. There is a huge mis-sell­ing and mis-buy­ing risk, no con­trols on charges, com­pli­cated re­stric­tions and a mas­sive exit penalty. Ide­ally, this should be [solely] a first-time buyer Isa prod­uct.’

Savers can choose ei­ther a cash or stocks and shares ver­sion of the Life­time Isa.

A hand­ful of providers of­fer the cash ver­sion, best suited for sav­ing for a de­posit for a home.

Skip­ton BS pays in­ter­est of 1 pc, Not­ting­ham BS 1.25 pc, New­cas­tle BS 1.1pc, Paragon Bank 1.15 pc and Money­box, through its app, 1.4pc. Among those of­fer­ing the shares ver­sion — more suit­able for re­tire­ment sav­ings — are in­vest­ment plat­forms AJ Bell, Har­g­reaves Lans­down and Nut­meg. So far only 166,000 opened a plan in the first year against 200,000 ex­pected by the Govern­ment. None of the big banks of­fer ac­counts. Na­tion­wide says it has no plans to of­fer one as it has con­cerns over the exit penalty. Skip­ton BS says nine out of ten of its 154,000 plan hold­ers are sav­ing for a house de­posit rather than re­tire­ment. Jen Lloyd, life­time Isa man­ager at the so­ci­ety says: ‘The cash Life­time Isa is a valu­able way for young savers to achieve home own­er­ship.’

AJ Bell says the shares ver­sion can ap­peal to those with in­comes over £210,000.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.