Should you jump to get the first cash LISA? For most savers, I think the answer is no.
You’ve possibly heard about the new Lifetime ISA – or LISA – that was launched in April. I say launched, but there were only three providers who offered it back then, and only as Stocks and Shares LISAs – which obviously come with the risk that your investment could go down over time.
Now, two months on, we’ve finally got the first cash LISA, where your deposit can’t fall and you’ll earn interest on top. I’ve been (geekily) looking forward to this, but it’s turned out to be a big letdown.
Skipton Building Society has announced you’ll be able to get your hands on their cash LISA from Thursday 8th June with a deposit of just £1. The problem is it pays just 0.5%. Pathetic. Unless you’re planning on buying your first home in a year’s time I’d stay well clear of it.
Hang on, you might be thinking, isn’t the point of a LISA to get a huge 25% bonus from the government? Yep (more on this further down the page). But the way a LISA works means jumping at this first one could mean you actually lose out.
How Lifetime ISAs work
You can save up to £4,000 a year into a LISA and in return get a 25% bonus from the government. Sounds like easy money yeah?
Well there are conditions attached, the key one being you need to be under 40 years old to open one, though you can keep saving in one until you are 50 years old.
Then there are further restrictions, primarily that there are just two ways to get the bonus.
The first way to get this free money is to use it towards your first home – though the home can’t be worth more than £450,000 and you have to live there (i.e. you can’t rent it out).
Alternatively you can wait until you hit 60 years old. Then you can access your cash and the bonus to help fund your retirement. The general consensus among experts seems to be this really should be in addition to a pension rather than instead of.
I’ve already got a mortgage, but I’m certainly going to take advantage of the option to save for when I reach 60 years old. Luckily I’m still in my late 30s!
But, and it’s a big BUT you need to be aware of, there is a 25% penalty on the savings and bonus if you take the money for any other reason. Although at first that seems like you just lose the bonus, you actually lose some of your initial savings too. For example: £4,000 plus 25% is £5,000. But £5,000 minus 25% is £3,750.
The only exception is if you die or are diagnosed with a terminal illness.
When you should avoid the new cash LISA
All sounds good right, but this offering from Skipton isn’t right for me, and I don’t think it’s right for most. Here are some of the scenarios when I’d say not open up one of these new cash LISAs.
If you’re buying your first home before June 2018
Since the LISA needs to be open for 12 months, won’t be able to use one for your home purchase. A Help to Buy ISA is a better option. These can be accessed once you’ve saved a minimum of £1,600, which can be reached in three months. Plus interest (which you can earn as well as the bonus) is higher on Help to Buy ISAs- Barclays currently offers one at 2.27%.
If you won’t be buying for more than a year
Stick with a Help to Buy ISA and see if there are better-paying cash LISAs released over the course of the year. However, if it gets to a point where you hope to buy in a year’s time, then look for the best paying LISA you can to start the 12-month countdown.
You’re opening up one for retirement
This is the one that relates to me.
You can deposit up to the maximum £4,000 into a LISA on April 5th and still get the full 25% bonus for the 2017/18 financial year. So rather than do it now for a pitiful 0.5%, put that money somewhere with better interest rates.
Even a standard ISA could get you around 1%, but regular readers will know I’m a big fan of using current accounts to get up to 5%.
This is what I’ll be doing, and as we get towards late March, I’ll look for the best paying cash LISA (if there are any!).
>> Read more about how I max my savings interest
You think you’ll need access to the cash before you buy a home or you reach 60
As explained above, you’ll have to pay the 25% penalty if you take out cash early – so you’ll actually lose money. If it’s likely you’ll need the cash earlier, look to other savings options.
When you should get the new cash LISA
However, there is one exception, when opening a LISA, whether that’s a cash or a stocks and shares one, needs to be done sooner rather than later.
If you’re hoping to buy your first home in a year’s time
When you first open a LISA, you can’t use any LISA savings and bonuses until 12 months have passed. So if you plan to buy a house in a year’s time, you could open up one of the new accounts, even if it’s just with one pound.
But in the short term you’d be better off keeping your savings in a Help to Buy ISA as you can get better interest rates.
Then you can transfer that money across before 5th April to your LISA – and top it up to the max £4,000.
If you are buying your first home, I’d recommend reading the LISA guide written by my friend Helen for Money Saving Expert.
Hi, I want to open a LISA for the purpose of saving for retirement. But not sure what would be better the cash one with Skipton or a stocks and shares one with Nutmeg? I realise there are charges etc with companies like Nutmeg, do you think this outways the pros and that it is best just to stick with Skipton? Thanks
Hi Andy,
I do apologise if you’ve already answered these questions before but I’m just after some clarity on my specific situation.
Me and my partner are both looking to buy a place in hopefully around a years time. We are both first time buyers and don’t currently have either a LISA or a HTB ISA.
After looking through all the information I can find, I’m thinking our money is best invested in a HTB for the duration of the next year because the interest rates are better. So I’m thinking both of us open a LISA now and put £1 in each. Then both also open a HTB ISA each and do the max contributions into them for the next 12 months. Then at the end of the year, take all of the money out of the HTB’s (including all the interest) and put it into the LISA’s and then top them up to the maximum £4000.
This way we’ll be getting best of both worlds, the better interest from the HTB’s and the bigger capacity in the first year from the LISA’s.
Am I right with this or am I missing something that says we can’t do that?
Also, if we had the LISA’s for another month before we bought our new house (13 months from now in total) could we both put another £4000 in each and get the bonus straight away? I.e. Get the bonus paid on £8000 each after having the LISA’s open for 13 months?
Sorry for being a bit difficult!
Thanks
Jack
Jack, sorry for not responding to you on this. Is slipped through somehow! Yes you could do that, but I think you’ll be better off putting your savings in a high interest current account or regular savings account. You can get 5% this way. Then put that into the LISA. The only reason to do the HTB instead is if you think you will buy before 12 months time. I”ve covered it in a bit more detail in my podcast this week – https://becleverwithyourcash.com/cashchats53/
Hi Andy.
I’m hoping to get a mortgage within few years and LISA with Skipton seem to be the best option in my case. However, it’s still a bit which I do not understand-limitation for paying in are not clear to me.
I have a cash ISA (not help to buy) open with Barclays for more than 2 years.
Can I open LISA and transfer up to £4000 from my current ISA to get 25% bonus before and of the tax year? Or should I open it with £1 and wait until new tax year as no bonus would be added if Lisa is open for less then 12 months? Could you help me with this, please?
ps:I understand that if my wife is an owner of her family house(only formal-not leave in, neither getting any benefits from) I can open my Lisa but she can not?
Please correct me if mistaken.
Kind Regards
Greg
Hi Greg,
Yes, so if you transfer the £4k before the end of the financial year you will get the 25% bonus. BUT you can’t cash it in until you’ve had it for a year. So it’s worth opening it with £1 to get it started now and transfer the money later.
Your wife can open an LISA – but only for retirement
Hi – I have a Help to Buy with ~£5.5k in it at the moment- can I transfer this over to a LISA and add another £4k before April 5? So keep paying into HTB – transfer to LISA on say April 4, add £4k extra as well, then add £4k on April 6? Would that be allowed? Many thanks
Hi Mike, it’s all a bit complicated. It depends how much money you’ve put into your Help to Buy ISA this financial year. Say it’s the full £200 a month for 12 months (£2400), then the LISA annual limit would exclude that amount, so the max you could pay in extra would be £1600 (possibly a bit less if you’ve transferred interest over too). Stil that’s better than nothing! But you need to have opened a LISA for 12 months before you buy to claim the bonus.
hello mate Im 37 and thinking of just putting 20 pound a month in till i hit 50 just as some extra money the plan is not to touch it for 13 years and if i die does my next of kin get the money as i cant find any info on what would happen
thanks mate
Hey Stephen, it’ll be treated like any other asset, so you could say in your will who you’d leave the money to. There won’t be any penalties to withdraw the money early either. Though there would be inheritance tax. Hope that helps
Hi Andy
I’m hoping to buy my first flat/house within the next couple of years and have been trying to work out where is best to save. The LISA bonus seems too good to be true, but I was thinking of doing the following but I’m no expert so could use your advise! My money is currently in an isa with Coventry Building Society that I’ve had for years and the interest is okay but not as good as the bonus offered. I haven’t got a help to buy isa as I’ve previously been travelling and in changing jobs so wanted easy access to my money, but now I’m set where I am I was thinking of opening the Skipton LISA for a pound and a help to buy isa, putting a chunk of my money in the help to buy for now and then in march moving four grand of it into the LISA to get the bonus for that tax year. would this be allowed/ get me the best bonus or am I missing something here? I want to get the one year countdown started asap and have got the impression LISA can be transferred if one with better rate comes along but as there aren’t really any there isn’t much info! Would appreciate your input as finance is not something I understand too well!
Hey Robyn, so you can do both at once and transfer the Help to Buy ISA over. In the article I’ve linked to something my friend Helen wrote for Money Saving Expert. Take a look through that as it should explain what you need to do for this. Good luck!