Get paid £1,000 to save every year with a Lifetime Isa

More than half a million savers earn up to £1,000 a year in free money by opening a Lifetime Isa (Lisa) to buy their first home or save for retirement.

Lisas were launched in April 2017 and savers deposited £1.25billion in the 2019/20 tax year. But the lucrative program comes with strict rules that, if broken, result in a hefty penalty that will leave a dent in your nest egg.

Here we explain how Lifetime Isas work, their pros and cons – and how to choose a good deal.

Long-term savings: Lisas were launched in April 2017 and savers deposited £1.25bn in the 2019/20 tax year. But the lucrative scheme comes with strict rules

Join the club

The latest provisional figures from HMRC showed there were 545,000 subscriptions to Lifetime Isas in 2019/20.

To open one, you must be 18 or older and under 40. You can deposit up to £4,000 per tax year and earn a 25% bonus on contributions up to £1,000 per year. The £4,000 counts towards your annual Isa allowance of £20,000.

As with a regular Isa, you can choose a cash or stock and stock option. You earn tax-free interest on your savings, plus a government bonus, and pay no tax on dividends or capital gains if your money is invested.

To avoid losing the “free money” and also losing some of your own savings, you must follow government restrictions on how you spend your savings.

You can use them to buy your first home, which can’t cost more than £450,000, or you have to leave them untouched until you’re 60.

There is an exception for account holders who are seriously ill. Withdrawing money for any other reason will incur a 25% withdrawal fee.

Holly Mackay, managing director of personal investing website Boring Money, says: “Lifetime Isas are great if you’re sure you want to buy a home. But they are not for the undecided.

“The penalties if you change your mind or can’t leave it until you’re 60 are heavy. If that’s the route you’ve chosen, however, you won’t get the same guaranteed tax-free return anywhere else.

Your bonus is automatically added to your account each month, based on the value of your total deposits from the previous month.

You cannot buy a property using your Lisa savings until at least 12 months after making your first deposit, so open your account as soon as possible.

Being an early riser has other benefits too, says Cecilia Mourain, managing director of home buying at personal finance app Moneybox.

She says: ‘You can open an account with just £1 and start getting the government bonus, so even if you can’t use the full £4,000 tax-free allowance every year, every little bit counts.

The non-taxable allowance and premium cannot be combined from one year to the next. If you don’t use it, you lose it.

Couples buying their first home together can each have a Lisa and combine their individual bonuses to increase their buying power.

First time buyers: You cannot buy a property using your Lisa savings until at least 12 months after making your first deposit, so open your account as soon as possible.

First time buyers: You cannot buy a property using your Lisa savings until at least 12 months after making your first deposit, so open your account as soon as possible.

Long term gains

If you are already an owner, you can deposit into your account and benefit from bonuses until your 50th birthday, but you cannot withdraw your savings until you are 60 years old.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says: “If you are employed you should take full advantage of all the [pension] contributions that your company is willing to pay. After that consider paying in a Lifetime Isa.

“The self-employed may find them particularly advantageous because they do not benefit from self-registration.”

If you opened a Lifetime Isa in cash paying 0.5% interest at age 18, paying the maximum amount until your 50th birthday, you would have £188,998 by your 60th birthday.

According to Hargreaves Lansdown, using Lisa stocks and shares paying an annual return of 5% would increase your funds to £597,868.

Once you’ve used your Lifetime Isa savings to access the homeownership ladder, you can start saving in your account for retirement again.

Penalty pain

The biggest downside to the Lisa is the 25% withdrawal penalty. At first glance, it looks like the government is just taking back its 25% bonus.

Yet, you will also lose some of your savings. If you put £4,000 into your Lifetime Isa, you will receive the 25% government top-up, bringing your balance to £5,000.

If you later withdraw £5,000, you will be charged a 25% withdrawal penalty of £1,250, removing £250 from your savings.

Between March 6, 2020 and April 5, 2021, the government reduced the withdrawal penalty to 20%. Ms Morrissey wants to see the penalty return to 20 per cent permanently.

She says: “Although savers open a Lifetime Isa with the best intentions of investing and contributing for the future, if something unexpected happens and you need that money, you should only lose the bonus, not your own savings too.”

In the last fiscal year, the government took in £34million in charges.

Another pitfall for first-time buyers is the maximum purchase price cap of £450,000.

According to the latest quarterly figures from the Office for National Statistics, the average price paid by a first-time buyer in London was £449,000, compared to £242,000 for the rest of the UK, putting residents of the capital almost at a loss. limit.

A first-time buyer who exceeds the limit when purchasing their property will also trigger the withdrawal penalty.

I buy a house thanks to confinement

Lucia Harrison opened a Lifetime Isa with £1 in September 2020 to start

Lucia Harrison opened a Lifetime Isa with £1 in September 2020 to start

Lucia Harrison, first buyer, plans to buy a house this summer.

Knowing that her Lifetime Isa must be operational for 12 months before any purchases, she opened it with £1 in September 2020 to start.

Since then, management accountant Lucia, 26, has invested £8,000 of her money and received £2,000 in bonuses. She plans to save another £4,000 before the summer to earn an extra £1,000.

Lucia, from Bristol, says before the pandemic she spent a lot of money on herself and never considered the future. But with the shops closed, she realized how much she could save for a house.

Lucia puts £500 a month into Lifetime Isa cash with the Moneybox app, where she also owns Isa stocks and shares.

She also invests through the Plum and Freetrade apps. “I will buy my house solo, but I will have someone living with me to help pay the mortgage,” she says. ‘Then I can continue to save in my Lifetime Isa and my investments.’

Invest better?

Ms Mourain says: “If you’re investing for the long term, for five years or more, Lifetime Isa stocks and shares can offer higher returns than putting your money in a savings account.

“But it’s important to remember that the value of your investments can go up and down and you can get back less than you invest.”

If you saved the maximum amount in a Lifetime Isa in cash paying 0.5% interest between the ages of 18 and 32 – the average age of a first-time buyer – you would have a deposit of £78,071 to withdraw.

Savers choosing a stock and equity account with a 5% yield would have a pot worth £109,341.

Those with less than five years to build up their security deposit are encouraged to use a Lifetime Cash Isa to protect their nest egg from stock market volatility.

Although your capital is not at risk in a savings account, savings rates are well below inflation.

Over time, inflationary pressures will erode the value of cash savings, giving you less purchasing power in the future.

Shop

The highest interest rate on a cash Lisa is 0.85% offered by Moneybox, according to Savings Champion.

You can only operate the account through an app on your mobile phone and the opening investment is £1.

If a Stock and Stock Isa is for you, you’ll need to decide whether you want to use a DIY investment platform, where you choose your funds and stocks or rather choose a ready-made portfolio tailored to your risk appetite.

Help to buy isas

Purchase assistance is closed to new applications on November 30, 2019, but you can pay for yours until November 2029. You then have an additional 12 months to claim your government bonus.

The maximum you can save is £12,000, by depositing no more than £200 per month. Each monthly deposit is matched by 25%, giving you a maximum bonus of £3,000.

You can hold an Isa and Lifetime Isa purchase aid at the same time, but you cannot use your Lifetime Isa to buy a house. You can transfer your savings to your Lifetime Isa.

The transfer counts towards your lifetime Isa allowance of £4,000.

Retirement on track for £12,000 boost

Victoria Nicholl opened a Lifetime Isa to boost her retirement savings just in time.

The business development manager, 41, heard about his generous benefits, but only had a year left to open an account.

“I entered just before the age limit of 40,” says Victoria, who lives in London. “Now I will be able to get a total of £12,000 in government bonuses over time.”

Since opening Isa shares and shares with Nutmeg in 2018, she has £17,559 after paying almost £15,000. The value of the fund has recently fallen from around £20,000 last year.

Victoria saves into the account monthly, using her £4,000 allowance. She makes regular payments rather than a lump sum to take advantage of stock market declines in order to buy units of her funds at a lower cost.

Victoria has a ready-to-use portfolio rather than choosing funds. She says: “Five years ago I realized that relying on my state and company pensions might not give me the lifestyle I want in retirement.”

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