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!).
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.