The new tax year starts on 6 April, which means there’s just one month left to fill your Lifetime ISA allowance for this year.
Miss the deadline, and you could lose out on a potential free £1,000 bonus towards your first home.
Lifetime ISAs (LISAs) first launched in 2017, and they were a replacement for its Help to Buy ISA predecessor cousin.
LISAs are a tax-free savings account which lets you save up to £4,000 per tax year.
For a detailed explanation and how it compares to the Help to Buy ISA see my full www.mse.me/lifetimeISA guide, yet in a nutshell…
As long as you’ve never owned, or part owned a home (in any way) you can use the money as a deposit for a mortgage towards any residential property that costs up to £450,000.
- The money and bonus can also be taken out once you hit age 60.
- You get a 25% bonus on everything you put in. For every pound you contribute in a year, the state will add 25%, until you’re 50. So, if you save £1,000, you’ll have £1,250, and if you save the full £4,000, you’ll have £5,000.
That means if you fill this years now, and you had another £4,000 to save you could put that in on the 6 April – so you’d have £8,000 in by then.
- There’ll be a penalty if you withdraw cash for anything else. You can withdraw money whenever you want, but if it’s not for the property – or at retirement - there will be a 25% penalty (remember you’ve already been given a 25% bonus). The maths works out that for every £100 you put in, you get £93.75 back, so only put in money you know you’ll use for a qualifying home buying or retirement.
So, if you want a LISA sort it soon, so you can use this year’s allowance now, and then you get another one on 6 April.
Sadly though, LISAs aren’t available to everyone That’s the rub. You must be aged 18 to 39 to open one. Yet as long as you open it the day before you’re 40 you can then continue to use it afterwards.
The bonus is then paid until you’re 50. So open at 18, and get the full 32 years of the maximum bonus and that’s £32,000 free (assuming the rules don’t change).
The other big timing issue is that there’s a rule that says to use the bonus for a home, you need to have had it open for at least a year.
So, I’d urge anyone considering it to at the very least put in a £1 now, as that starts the clock ticking, so that if and when you do have money to put in it, and want to buy a house quickly, you’re ready to go. Of course, if you can save more, then do.
There are two types of LISAs. Cash LISA and Stocks and Shares LISA. There aren’t many top cash LISAs to choose from, as not many providers offer them, but top is app-based www.moneyboxapp.com which pays 1.4% AER followed by the branch and online www.thenottingham.com building society paying 1.25% AER.
You can also open an investment LISA, meaning your money goes into stocks and shares
There are more choices here including the likes of www.hl.co.uk, www.ajbell.co.uk and www.nutmeg.com. Though remember with these you’re taking a risk, and these are far less suitable for those who’ll be using the money within 5 years.
If you can’t get a LISA, let’s say because you’re too old, then if you opened a Help to Buy ISA before they closed for new applications in November last year, you can keep saving in it till November 2029 and use it for the 25% house bonus till December 2030.
If you didn’t open a H2B ISA then it’s a question of just putting your money in the best savings accounts. For regular saving you can put up to £500/month in the www.coventrybuildingsociety.co.uk regular saver earning 2.5% AER. Or, for lumps with easy access there’s www.marcus.co.uk and www.saga.co.uk 1.3% AER. Full help in my www.mse.me/topsavings guide.
You can use a LISA for retirement savings, but for most it ain’t such a no brainer
The LISA versus pension argument is complex and detailed, so I’m only going to scratch the surface here.
If you’re employed, the auto-enrolment scheme means most people are automatically saving into a pension, and if you do then your employer has to contribute as well.
In this case if you’re saving for retirement, the first thing to aim for is to put enough in your pension that your employer maxes out its contribution.
Plus, money in a pension is saved from gross (pre-tax) income. This means the tax benefit for higher (40%) rate taxpayers works out like a 66% boost, smashing the LISA. And for basic rate taxpayers it’s a 25% boost, the same as a LISA.
So, in simple terms the only time the Lifetime ISA even matches pensions is for basic-rate taxpayers who are self-employed. And while the LISA is more flexible, as it allows early withdrawals (for a penalty), this is balanced by the fact the money in a Lifetime ISA, unlike a pension, counts as savings, so it can diminish benefits and other entitlement.
Martin Lewis is the Founder of MoneySavingExpert.com. To join the 13 million people who
get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip