The new Lifetime ISA that could mean up to £32,000 of FREE CASH!
Get prepared for a major shake-up for first-time buyers. In a couple of weeks, when the new tax year starts and the new Lifetime ISA launches, you could get up to £32,000 of free cash towards your home. And according to our Money Saving Expert Martin Lewis, EVERY first-time buyer should consider putting at least £1 in on the first day, 6 April. So we put our questions to him…
It’s a new tax-free savings product that lets you save up to £4,000 a year in it, as either cash savings or stocks and shares. There are five need-to-knows.
1.You get a 25% bonus on everything you put in. For every pound you contribute, the state will add 25% on top, each year, 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.
2.It’s for first-time buyers... The money can be used for first-time buyers to use as a deposit towards a residential property that costs up to £450,000, provided the Lifetime ISA’s been held for 12 months or more.
3.… or for retirement savings. The money can be used for saving for later-life planning and can be taken out once you hit 60.
There’s a 25% penalty if you withdraw cash for anything else. You can withdraw the money whenever you want for any purpose, but if it’s not for one of the two things it’s designed for, there’s a 25% penalty (remember you’ve already been given a 25% bonus). The net effect of that is for every £100 you put in, you get £94 back, so try to only put in money you know you’ll use for home buying or retirement.
5.You must be aged between 18 and 40 to open one. So, if your 40th birthday is on 6 April when it launches, you’ve missed out. If you turn 40 on 7 April, then you must open it on the 6th, or you’ll miss out. The bonuses are then paid until you’re 50. So, 32 years of the maximum bonus is £32,000.
Q. Why do you say ‘every first-time buyer should put £1 in’?
Well, obviously the bonus makes this a no-brainer – it’s a huge boost. But the rules say that to use it for a home, you need to have had it open for at least a year. Of course, some will be buying more quickly, so won’t be able to benefit. Yet putting the £1 in when it opens starts the clock ticking, and if you don’t use it you can withdraw it later. In fact, even if you’ve no plans to buy a home now but you qualify, just put it in, so if you do change your mind in a year or so, you can put cash in and immediately benefit.
Also, parents or grandparents who want to give money to younger people may want to give them money to put in one.
Q. Is it worth using for retirement savings?
I’d put a BIG WARNING here. While it is a flexible option, and allows you to withdraw cash, for most people, using the Lifetime ISA for retirement is less rewarding than saving in a pension (assuming you invest in the same thing). In fact, I’ve campaigned that there should be warnings about this when you sign up.
With a pension, you save from gross (pre-tax) income – which for basic-rate taxpayers is a bit like a 25% boost in its own right, the same as a Lifetime ISA. For higher-rate taxpayers it’s like a 66% boost, which smashes the Lifetime ISA.
Plus, if you’re employed, the auto-enrolment scheme means that if you save into your pension then your employer has to as well, which you don’t get from the Lifetime ISA.
So the only time the Lifetime ISA even matches the pension is for basic-rate taxpayers who are self-employed. Though even then, the Lifetime ISA, unlike a pension, counts as savings, so it can diminish your benefit entitlement. Therefore, for most people the Lifetime ISA should only be used at best as a secondary way to save for retirement.
Q. When does it start and what deals are available?
Lifetime ISAs launch on 6 April 2017. So far, only stocks and shares providers have confirmed they have a product ready for launch, including Hargreaves Lansdown, Nutmeg, The Share Centre, Metfriendly and (from later in April) AJ Bell. Even though many big banks and building societies have said they won’t have a cash Lifetime ISA open in time, I’m still hopeful one will.
Q. How does it compare to the Help to Buy ISA?
The Help to Buy ISA works in a similar way to the Lifetime ISA for first-time buyers, as it also gives a 25% bonus on the amount you put in it. But you can put less in: just £1,200 in the first month then after that, £200 a month, and the maximum bonus is smaller – up to £3,000. Plus, you can only use it for a mortgage deposit (the Lifetime ISA can be used towards that and the home deposit) and you can only use it on a home up to £250,000 (£450,000 in London). However, you can use the Help to Buy ISA more quickly (you just need £1,600 in it). So if you need to buy soon, the Help to Buy ISA wins; if you can wait a year, the Lifetime ISA does.