Lifetime Isas: the under-40s Isa
Lifetime Isas are a slightly odd hybrid savings vehicle, but they can be useful – especially for home deposits
Lifetime Isas (Lisas) are the youngest member of the Isa family, but also the most generous, with a government bonus of up to £32,000 on offer. Lisas are aimed at people who want to save for their first house or for their retirement (or both). Any money deposited into an account can only be withdrawn either to buy your first property, or after your 60th birthday, in effect, as a retirement fund. Access your cash for any other reason – except if you are terminally ill – and you’ll pay a penalty amounting to 25% of the money taken out.
To open a Lisa, you must be aged between 18 and 40. You can deposit up to £4,000 a year to which the government will add 25%. So, you could get £1,000 of free cash every year with these Isas. You can put money into a Lisa until you are 50, so, if you deposited the full amount each year from the age of 18, you could get a total of £32,000 in government top-ups (assuming the terms and conditions remain the same).
On top of that bonus, Lisas have the same tax perks as traditional Isas, and can also be used to hold cash or investments. Just be aware that any money paid into a Lisa counts towards your overall Isa allowance. So, if you put £4,000 into a Lisa you can only put £16,000 into other Isas in the same tax year.
Using your Lisa to buy a house
Lisas are a great place to save a deposit for your first house. Getting up to £1,000 a year from the government could really help you meet your deposit goal. Just make sure to research your local property market before opening a Lisa – deposits can only be used to buy a house worth up to £450,000. While this may not be an issue in most parts of the UK, in London the average house for a first-time buyer now costs £444,592, so just bear this in mind.
If you start saving for a house and house-price rises take your purchase price beyond the £450,000 limit, you have two choices – either pay a 25% penalty to access your money, or leave it invested until you turn 60. Clearly neither of those options is ideal – the 25% penalty would more than wipe out your annual government bonus, while you presumably really don’t want to wait until you retire to buy a house.
To be able to use Lisa money to buy a house you must open your account at least 12 months before you want to buy. You must also use a conveyancer or solicitor for your property purchase as the money will be paid directly to them.
Is a Lisa best for retirement?
What about the retirement option? With up to a £32,000 contribution from the government it sounds attractive, and if you have maxed out your annual pension contributions already then a Lisa can make a great pot for extra saving.
However, think carefully before using a Lisa rather than a pension as the main vehicle for your retirement savings. For one thing, if you can join a workplace pension, prioritise this, simply so that you don’t miss out on the contributions from your employer. Also, while you don’t pay tax on money withdrawn from a Lisa (whereas you do on a pension), if you are a higher-rate taxpayer and expect to be a lower-rate one when you retire, then a traditional pension will probably be the more tax-efficient option overall.
The best options for opening a Lisa
The rates currently available on cash Lisas aren’t dazzling, but you can transfer your Lisa to another provider if rates improve. So, open one now to make the most of your allowance, then be ready to move if you see a better interest rate elsewhere.
Moneybox is offering the best rate on a cash Lisa at present, but, at a mere 0.85%, it’s not going to knock your socks off. That rate includes a 12-month bonus of 0.6 percentage points, so make a note to look at transferring to another Lisa after a year. This is an app-based account with no minimum deposit, and it accepts transfers from other types of Isa.
If you don’t want an app-based account, then Newcastle Building Society has the best rate at 0.5%. You can operate this account online, by phone or by post. Isa transfers are accepted, but only from existing Lisas, not from other Isas.
Anyone planning to use their Lisa savings for retirement should consider an investment account as cash simply won’t keep up with inflation. “Seeing as money in a Lisa is actually locked away until you’re 60, if you’re saving for retirement, it definitely makes sense to consider shares over cash for such a long time frame,” says Laith Khalaf at AJ Bell.
If you want a straightforward ready-made portfolio, then roboadviser Nutmeg’s fixed allocation portfolios are worth a look. Nutmeg offers five diversified portfolios made up of exchange-traded funds, each with a different risk level (from low to high). There is a maximum platform charge of 0.45%, plus 0.2% in fund costs.
There are only two Lisas on the market that allow you to pick your own investments – these are offered by Hargreaves Lansdown and AJ Bell. The latter is lower cost with a platform fee of just 0.25%, and trading costs of £1.50 for funds, plus up to £9.95 for shares. Hargreaves Lansdown has a platform fee of 0.45%; fund trading is free; and share trades cost up to £11.95.
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