The world of savings can be confusing but if you know your ISA from you Lisa then you could be quids in.
April will mark the newest addition to the stable of products known as ‘individual savings accounts’, in the form of the ‘lifetime ISA’ (sometimes known as Lisas).
You may have heard of ISAs, you may even have one, and it’s probably a cash ISA paying you a rubbish amount of interest. If you’ve really on top of your money, you may have invested through a stocks and shares ISA.
Whatever experience you’ve had of ISAs, all you need to know about them is that you pay into them from taxed income (your wages) and once the money goes in anything you make on your cash is tax-free, and you won’t get taxed when you take the money out.
All ISAs work on this premise. What makes the lifetime ISA so special though is that the government will contribute to it if you do.
You can save up to £4,000 a year into the lifetime ISA and the government will give you a 25% top-up. So if you save the full £4,000 you’ll receive a bonus of £1,000, and if you save £1,000 over the year, you’ll receive £250.
Free money from the government – you don’t get that every day!
However, because the government is giving you a generous top-up, there are stipulations around how you use the money. There are two things the government wants you to use the money for: firstly to buy your first home (not a second property such as a holiday home or buy-to-let) to help you fulfil that British rite of passage of becoming a homeowner.
Secondly, you can use it to save for retirement, accessing your money when you’re 60 to fund your old age. If you max out your lifetime ISA savings every year until age 60 the government will give you £1,000 a year until age 60.
Lifetime ISAs sounds like a great deal, and they are as long as you play by the government’s rules. They stop becoming a good deal if you want to dip into your money for anything other than buying your first house, or funding retirement at age 60.
If you access your cash before age 60 and it’s not to buy a home, you’ll lose the bonuses you earned, plus the interest paid on those bonuses and you’ll have to pay a 5% penalty on top.
The chancellor is going to be giving away a load of free money to savers and he doesn’t want it used for holidays and new cars so the penalties for accessing your savings outside of the rules have to be harsh.
But don’t be scared by the lifetime ISA charges, they’re still a brilliant way to save especially for those wanting to get on the property ladder. If you hadn’t noticed, property is pretty expensive these days and people are having to save harder and longer in order to scrape together a deposit.
The government previously brought out the Help to Buy ISA to encourage people to save for their first home. It allowed you to save up to £2,400 a year (or £3,400 in the first year) with the government topping it up by 25% – up to a maximum of £3,000.
(Note that the bonus was paid when you purchased a property so you couldn’t earn interest on it.)
You were then allowed to use that money to buy a home worth up to £250,000, or up to £450,000 in London.
This was a decent start but the Help to Buy ISA pales in comparison to the lifetime ISA. Even though you still receive 25% bonus, you can save more (£4,000) and the maximum bonus you can earn is far higher at £32,000 over 32 years.
The other benefit is your bonus is paid annually so you can earn interest on it.
And when you come to buy, you can use the money to put down a deposit on a property worth £450,000 regardless of where you are in the country.
If you have a Help to Buy ISA currently you will be able to transfer that money into a lifetime ISA in April and start saving at the higher level.
Owning your own home is a life milestone most people want to get to and the bonus offered in the lifetime ISA will help you reach your deposit goal quicker. But let’s not be daft enough to think that it will magically make you a homeowner after a couple of months saving.
People in their 20s and 30s, and even 40s, will have to save more for longer if they want to own a property. Gone are the days when you could own a property at age 25 (unless you have inheritance or generous parents).
That’s why people have to get on top of their finances now in order to have any hope of owning their own pile of bricks in the future. You might have to save for 10 years to afford your first home so put a plan in place now.
I live by the financial rule of ‘paying yourself first’. This means set up a direct debit to a savings account so that when your wages come in, a payment is made into an account (like a lifetime ISA) along with payments for things like rent and utilities.
The money you have left over after your bills and savings are paid is yours to use as you like without the guilt of not putting anything away for the future you.
Paying yourself first means that in the future you will, in time, be walking through their own front door.