If you’re under 40 and open a Lifetime ISA you’ll get a 25% bonus – and the deadline for the first payout is around the corner. You just can’t get it until you’re 60 years old…
It’s almost a year since the first Lifetime ISAs, or LISA, became available. These ISAs have two purposes. You can either use the money saved and bonus to buy your first home or access it when you retire.
There was a lot of noise in the press, then… well not much. Only a handful of ISA providers launched a LISA and they were all investment ISAs, i.e. stocks and shares. It wasn’t until June that Skipton Building Society launched a cash LISA.
At the time I wrote how I wasn’t going to bother getting one. Instead, I was going to wait to see what else happened as the year went on. Well, in all honesty, very little has changed.
There have been no new Cash LISAs. My cash was better off invested in high paying current accounts, regular savers and apps like Chip where I’d earn up to 5%. Much, much higher than the 0.75% Skipton currently offers.
But there is a big reason why I’m going to nab a LISA in the next few weeks, and it’ll give me a free £1,000.
NB – this article is mainly about using the LISA for retirement, not first-time buyers. I talked a bit about transferring Help to Buy ISAs to LISAs in my recent podcast.
Why open a LISA now?
With a Lifetime ISA you get a 25% bonus from the government. This bonus is going to be paid at the end of the financial year, so sometime just after 5th April (it might take a month or so to hit your LISA). It doesn’t matter if you’ve had the money sitting there for 12 months or 12 days, the bonus will be paid on the amount you have in the LISA on April 5th.
The maximum you can save each year is £4,000, making the highest possible annual bonus £1,000. But if you don’t have any money in a LISA before April 5th then you will miss out on this year’s bonus. Now, that might not be that big a deal since you can pay in each year until you reach 50 years old, and you might very well be thinking it’s unlikely you’ll be able to save £4,000 a year anyway!
But I’m going to at least take advantage of the bonus this year, and move £4,000 from savings elsewhere into a LISA.
Of course, you don’t have to pay in £4,000. The different LISA providers have different minimums, but with the Skipton Cash LISA it’s just £1.
Cash LISA or Stocks and Shares LISA?
Ok, so a Cash LISA is certainly more familiar to most of us. It works just like a normal Cash ISA. You put your money in, it earns (a little) tax-free interest, and you get that money out again at 60, along with the bonus.
On the other hand, a Stocks and Shares LISA is a little scary as any money you invest could fall in value. Now, there’s also a good chance it’ll go up in value, and by far more than the pitiful 0.75% interest rate you get with the Skipton LISA. And all the experts tend to say that investing is a long-term game. Even though there could be losses or slower growth in the short-term, over five or ten years it could very well beat the best cash savings.
Since you won’t be able to open a LISA until you are 60 years old, you’re certainly looking long-term. You can also move your investments around from higher risks portfolios through to more stable ones. However, do watch out for fees which can be quite high.
I made an attempt to understand investing this time last year. It was all a bit confusing, but I did manage to get the basics, and find some easy ways to get started that didn’t involve actively buying and selling shares.
So I’ll be opening a new investment LISA in the next few days and letting my money sit there for 20 and a bit years! I’ll either go for another “robo” platform, or look for a decent ready-made fund which combines lots of different stocks and shares. With either I shouldn’t have to do much except check in every now and again.
Doubling the invested bonus
The single, end-of-year payment is only happening for this first year. From the new financial year (i.e. April 6th), the Lifetime ISA bonus will be paid every month.
This technically means you could pay in £4,000 on 5th April, get your £1,000 bonus and then pay in another £4,000 later in April, with another £1,000 bonus following in May.
Why does this matter? Well, once the bonus reaches your LISA, it’ll also start earning interest (if a Cash LISA), or it can be invested along with the money you’ve paid in.
So if you’ve invested the money in a Stocks and Shares LISA, you’ll essentially get another lump sum to put into the markets now rather than in 12 months. So your free money will be earning you even more free money.
I’m not sure I’ll be able to afford to put another £4,000 in straight away as we’re looking at doing some work on our new house, but if I can make the numbers work I’ll def see what I can do.
However I wouldn’t pay in again so soon if you’ve got a cash LISA. Yes you’ll earn interest on the bonus, and that interest will also earn interest, and so on. But while the rate is so low we’re not talking much money. Instead I’d keep the cash for 18/19 in higher paying accounts instead, just as I’ve done for the last 12 months. Then pay it into the LISA next March/April to get that year’s 25% bonus.
Who can open a Lifetime ISA?
Well you need to be over 18 years old and under 40 years old for a start. Oh, and a UK resident. Once you’ve opened a LISA you can keep paying into it (or another LISA) until you are 50 years old.
The £4,000 limit is part of the annual ISA limit of £20,000, so you need to make sure you’ve not paid in the full amount this financial year.
Why you might not want to open a LISA
First up, remember you can’t access the money before your 60 years old without paying a penalty (unless you have a terminal illness). That penalty is 25%. Ok, that sounds as if you just lose the bonus. But you actually lose a little more too. It works out as about 6%. Here’s an example:
£100 + 25% = £125. BUT £125 – 25% = £93.75.
So only save or invest in a LISA what you think you can afford, which might well be nothing if you think you’ll need the money sooner.
For most people you’ll be better off paying more into your work pension. This gets tax relief, worth 20% to basic rate taxpayers, or 40% if you’re a higher rate payer. You might also be getting matching contributions from your employer. These can all make the money worth more in the long run. Plus you can normally access your pension at 55, five years earlier than with a LISA.
However, if you’re self-employed then you might not be getting any of these perks, so a LISA might be a decent bet.
If you want a good comparison of LISA vs pensions for retirement, read this article by my friend Helen at Money Saving Expert.