Every Thursday Savings Champion founder Anna Bowes gives us an insight into the savings market and how to make the most of your money. This week, she’s looking at Lifetime ISAs.
With inflation falling and savings rates staying pretty stable, the majority of savings accounts are paying more than inflation.
But if the interest is tax-free and you can benefit from a 25% government bonus on each deposit, that makes the Lifetime ISA (LISA) an even more important savings account to consider if you are eligible.
The top two accounts are not actually offered directly by banks but instead they are financial apps that use various partner banks which will vary from time to time.
So you need to do your research to check that opening a LISA with either provider will not take you over the Financial Services Compensation (FSCS) limit, which is £85,000 per banking licence.
Introduced in April 2017, the LISA offers a much-needed boost for younger savers who are looking to save for a deposit on their first home or for retirement.
The LISA is the obvious choice for anyone aged 18-39, as you can deposit up to £4,000 a year and you’ll receive a government bonus of 25% on each deposit, which you can keep as long as you use the proceeds to buy your first house – or until you are aged at least 60 as a retirement pot.
And the proceeds are tax-free.
If you deposited a lump sum of £4,000 a year for five years, you would receive £1,000 bonus in the month after the deposit – and after five years, assuming an interest rate of 4.40%, which is the best cash LISA rate available, you would have around £28,500 – made up of:
- £20,000 personal deposit
- £5,000 government bonus
- £3,500 tax-free interest
There are plenty of rules to watch out for with a LISA too, so it’s important to know the restrictions as well as the benefits before committing the money.
For example, there is a penalty for withdrawing the cash before the age of 60 for anything other than a first home purchase and the LISA must be held for a minimum of 12 months to avoid the charge.
The penalty, if it were to apply, is 25% of the amount withdrawn.
Although this would seem to simply be a return of the government bonus, it actually works out that there is an extra penalty of roughly 6.25% that will apply.
So, as well as losing the bonus, some of the money deposited would also be taken.
A LISA can be held in cash or in stocks & shares.
The most appropriate choice would depend on timelines, with shorter term funds usually better kept as cash and invested stocks and shares ISAs being more suitable for long-term money (five-plus years).
Any interest or growth would be tax-free within that Lifetime ISA wrapper.
