SAVERS could miss out on upto £10,000 free cash – but there’s only a limited time to sign up.
The free money offered by a Lifetime Individual Saving Account (LISA) can go towards buying a home or help you to see out your retirement.
1
The main caveat is that you must open an account before you turn 40.
Even if you don’t feel you currently want or have the budget to save into a Lisa, it’s a good idea to open one if you’re in your thirties or younger in case you want to use the scheme at a later date.
Many accounts can be opened with as little as £1 and parked ready in case you want to start saving higher amounts.
Any money squirrelled into the account, earns a bumper 25% bonus. You can put up to £4,000 a year in the account, meaning you earn an extra £1,000 on top of this cash.
The savings can go towards buying your first home or be taken once you are aged 60 or over. You can also withdraw the cash if you are terminally ill.
You cannot withdraw the savings under any other circumstances without incurring a painful 25% penalty.
The fee will more than wipe out any bonus earned meaning that you would take out less that you initially put in.
Therefore, you need to carefully consider if the account is right for your circumstances before piling in a stack of cash.
You can open an account once you are aged 18 and contribute up to the age of 50.
The Lifetime ISA limit of £4,000 counts as part of your overall ISA limit of £20,000.
If you pay in the full £4,000 a year, you’ll be limited to saving £16,000 a year in other ISAs you may hold.
As with other ISAs, you won’t pay tax on any interest earned inside the LISA.
Sarah Coles from investment and savings platform Hargreaves Lansdown, said: “Once you are 40 you can no longer open a LISA.
“However, if you already hold one you can keep paying in until you are 50.
“If you’re not sure whether you plan to use a LISA for retirement saving, opening one at age 39 keeps your options open.”
Using a LISA to help buy first home
If you plan to use a LISA to buy a home and save the full £4,000 a year into an account over ten years, you would receive a whopping free £10,000 towards the purchase.
However, there are some caveats. You must be a first-time buyer and the property can only cost £450,000 or less.
Laura Suter, director of personal finance at savings platform AJ Bell, said: “It’s easier for someone buying soon to know how much they will spend, but for those buying five or 10 years in the future it’s a bit harder to predict, as house prices may keep rising.
“Frustratingly the government hasn’t increased the limit since Lifetime ISAs were launched, so you can’t bank on it rising.
“But if you’re buying with someone else, so long as you both meet the criteria, you can each have a Lifetime ISA, which means you can both get up to £1,000 a year top-up on your deposit savings – double the free money.”
To use the LISA to buy a home, you’ll also need to be buying with a mortgage and can only buy a home with the savings after waiting at least 12 months after your first payment into the Lisa.
Plus, you’ll need to use a conveyancer or solicitor as part of the purchase with the ISA provider paying the funds direct to them.
How to use a LISA for retirement
If you don’t plan on using a LISA to buy a first home, you’ll have to use the savings as part of your retirement plans.
Cash can be taken at the age of 60 – six years earlier than the current state pension age of 66. Plus, money taken from a LISA is tax-free whereas from a pension only the first 25% of cash is tax-free.
The account could be useful as part of careful retirement planning.
If you opened an account just before your 40th birthday, you could save the full £4,000 a year to earn £1,000 each year until contributions cut-off at 50 – giving you an extra £10,000 towards later life.
However, it’s important to note that basic rate tax payers already get £1 for every £4 saved in pensions from the Government in tax relief, while higher earners get £2 from the Government for every £3 saved.
It means that if you earn more £50,271 a year, you are likely better off paying into a pension where you will get more money towards retirement.
And if you are saving through a work-based pension scheme you may also get your contributions matched by your employer, which you won’t get when saving through a LISA.
Another positive of a private pension is that you can usually access the cash from the age of 55.
How to find the best LISA
As with other ISAs, you will get different rates of interest with different providers so compare accounts to find the highest payers.
If you open an account with one provider, you can transfer it to another later down the line – for example, if a rate of interest becomes more competitive on another account.
You can also choose between a purely cash LISA or a stocks and shares LISA that can hold investments.
Laura from AJ Bell adds: “Anyone who has a Lifetime ISA account open but hasn’t used up their allowance should think about making a contribution before the end of the tax year to nab up to £1,000 of free money from the government.
“If you’re opening a Lifetime ISA you should also think about whether cash or investing is best for you – generally if you plan to leave the money for five years or more it’s worth considering investing.”
Where to find the best savings rates
Many savings accounts offer miserly rates meaning that money is generating little or no return.
However, there are ways to get your cash working hard. Sun Savers Editor Lana Clements explains how to make sure you money is getting the best interest rate.
Easy access savings accounts offer flexibility for customers, meaning they can dip in and out of cash when needed. However, the caveat is that rates can change at any time.
If you’re keeping your money in an easy access account, you’ll need to keep checking whether it’s the best paying account for your circumstances and move if not.
Check in at least once a month to see what is happening in the market.
Check what is offered by your bank – sometimes the best rates are for customers only.
But do search the wider market as often top savings accounts are offered by lesser known providers.
Comparison sites are a good place to check for the top rates. Try Moneyfactscompare.co.uk or Moneysupermarket.
You can search by different account type. You’ll usually get a better interest rate if you can lock your money away for a fixed amount of time, but it’s always a good idea to keep some money in an easy access account in case of emergencies.
Don’t overlook regular savings accounts often pay some of the best rates, but you’ll need to commit to monthly payments. This can be a great way to get into a savings habit while earning top rates at the same time.
