As cost of living pressures continue to squeeze budgets, and house prices remain at staggering highs, saving money is becoming more of a challenge. However, provided criteria are met, Lifetime ISAs (LISA) can afford savers with a bonus of up to £1,000 every year to put towards a first-time property, and financial journalist Martin Lewis has explained how.
Speaking at this year’s Ideal Home Show, which is running until Sunday, April 2 at Olympia London, Mr Lewis told listeners to get the clock ticking “now” on their lifetime ISA with just £1.
He said: “If you are 18,19, 20 up to 40, or your child or your grandchild is 18 up to 40 and they have never bought or owned a house in any way, get them to put a pound in a lifetime ISA.
“One pound, because then you have opened your lifetime ISA and you have started the clock ticking for that one year so that after a year if then they decide they want to use it, they can put £4,000 in and they can get the bonus instantly. So get the clock ticking now.”
Lifetime ISAs allow savers to put away up to £4,000, after which the Government will add a 25 percent bonus of up to £1,000 to the savings.
To open and continue to pay into a Lifetime ISA, people must be a resident in the UK, unless they’re a crown servant (for example, in the diplomatic service), or their spouse or civil partner.
While this is a particularly appealing perk and can help savers amass much more interest than a typical savings account, there are some key rules to be aware of when opening one, Mr Lewis warned.
He said: “There are some issues with the lifetime ISA though. The first one is if you take the money out for any other reason than buying your qualifying first-time property, or you leave it until you’re age 60, you pay a penalty.
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“Now here’s how the penalty works. You know you’ve got a 25 percent on the way in. You lose 25 percent on the way out. Now that sounds like you get back what you put in, doesn’t it? But let’s just do very simple maths again here.
“I’ve got 100 quid; it goes up by 10 percent. How much have I got? 110. If 110 goes down by 10 percent. How much have I got? 99. So if it goes up by 10 and goes down by 10, I’ve got less than I started with.
“If it goes up by 25 and down by 25, I have 6.25 percent less than I started with.
“So, there is an effective 6.25 percent penalty on withdrawing your money if not for buying a house, if not for saving until you’re in retirement, which means the lifetime ISA has some risks applied to it.”
There are also some important rules for Britons to take note of when putting their lifetime ISA savings towards a first property, too.
According to the Government website, the property must cost £450,000 or less and it must be bought at least 12 months after the first payment into the LISA is made.
People must also use a conveyancer or solicitor to act for them in the purchase – the ISA provider will pay the funds directly to them. People must also be buying with a mortgage.
If buying a property with someone else and the other person also has a lifetime ISA, they can use their savings and Government bonus too.
People can also take their savings out of a Lifetime ISA when they’re 60 or over to help with retirement. However, it must be noted, a 25 percent charge will be applied if the money is withdrawn and transferred to another LISA or type of ISA before 60.
It’s also important to note that when savers turn 50, they will not be able to pay into their lifetime ISA or earn the 25 percent bonus. The account will stay open and the savings will still earn interest or investment returns.
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