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Lifetime Isas 2019: how do they work and who offers them?

The Lifetime Isa is available for 18-39-year-olds, but is it right for you? - Credit: ACORN 1 / Alamy Stock Photo
The Lifetime Isa is available for 18-39-year-olds, but is it right for you? - Credit: ACORN 1 / Alamy Stock Photo

The "Lifetime Isa", which has been available since April 2017, is an option for those who want to save up to buy their first home or build a retirement savings pot.

For would-be homebuyers, the Lifetime Isa is an alternative to the Help to Buy Isa, which was introduced in December 2015.

This helps those who want to buy their first property by paying a 25pc government boost on contributions of up to £200 a month.

Many experts say the Lifetime Isa is an improvement: the Government still pays a bonus of 25pc but on a more generous annual allowance of £4,000 a year.

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But there are some catches, and the interest rate on Help to Buy Isas outstrips the Lifetime alternative.

We've outlined everything you need to know about the Lifetime Isa, including the companies that offer them, below.

Who can save into a Lifetime Isa and how much can they save?

You can open the account if you are aged 18 or over and less than 40. You can save up to £4,000 per year. The Government will then contribute £1 for every £4 – so £1,000 a year extra if you save the full £4,000.

Those who pay in the maximum amount between the ages of 18 and and 49 could see their savings boosted by £33,000.

For the 2017-18 tax year the Government bonus was paid at the end of the year but it is now added to the account monthly.

What happens when I want the money?

You can get hold of the money if you’re spending it on a first home (worth up to £450,000), for any reason once you’re over 60, or at any age if you're terminally ill.

If you need the money earlier for some other reason, you will pay a 25pc charge on your total pot. This is intended to reclaim the government bonus, but it will also take a chunk of any interest or investment growth.

So if you do need early access to your funds, you could actually end up with less than you put in.

For example, say you invest £100. The Government will give you a 25pc top-up, which will mean you have £125 in total. But if you need early access the 25pc exit penalty means you will end up with just £93.75. This is an effective 6.25pc tax on your savings.

What sorts of Lifetime Isa are available?

There are two types of Lifetime Isa - investment, and cash.

The investment option offers the chance of greater interest than the cash alternative, but this interest can vary. Both types of Lifetime Isa pay the Government bonus.

What do the investment Lifetime Isas offer?

 

Hargreaves Lansdown, The Share Centre, AJ Bell and Nutmeg were the first firms to offer an investment Lifetime Isa.

They have been joined by Moneybox, OneFamily, MetFriendly, Foresters Friendly Society and the latest, Unity Mutual.

The Unity Mutual Isa offer pays interest of 1.5pc from 6 April 2019.  It also offers free life insurance cover of up to £5,000 or 101pc of the value of your account if customers pay in at least £1,000 a year over the next five tax years.

Brokers Hargreaves Lansdown and AJ Bell both allow investments into a range of funds and shares. Hargreaves charges 0.45pc a year and AJ Bell charges 0.25pc on the whole amount invested.

The charge for holding shares - including ETFs and investment trusts - with AJ Bell is also 0.25pc but is capped at £30 a year.

AJ Bell and Hargreaves Lansdown permit savers to hold their money in cash. AJ Bell pays 0pc interest on cash balances of under £10,000, 0.1pc between £10,000 and £50,000, and 0.15pc on anything above £50,000. Hargreaves offers 0.15pc on cash savings above £5,000.

The Share Centre and Nutmeg have more restricted offerings.

The Share Centre is limited to three funds designed for cautious, moderate and adventurous investors. All have an annual management charge of 0.5pc. In addition the Cautious has an ongoing  fee of 1.67pc, for Balanced it is 1.76pc and on the Adventurous fund it is 1.56pc.

Nutmeg charges 0.75pc on investments of up to £100,000 for its fully managed portfolio range, 0.35pc beyond that level, and 0.45pc for its "fixed allocation" portfolios up to £100,000 and 0.25pc beyond, the same for its socially responsible portfolio. Additional fund charges also apply of 0.19pc, 0.18pc and 0.33pc respectively, on average.

Moneybox charges £1 a month to investors - although it's free for the first three months - and 0.45pc of the value of your investments each year. In addition, you will pay the fund management charges levied directly by the fund providers. These fees range from 0.12pc to 0.30pc per year

Its 2019 version of the Lisa invests in a global tracker fund from Fidelity, a property tracker fund from iShares and bonds and cash. If you decide to transfer your holdings to another provider, you'll be charged £25 per fund.

OneFamily charges customers a 1pc annual management fee, plus fund charges of 0.3pc, and you must invest in one of its two own funds and you can switch between them at any time free of charge. It requires a £25 direct debit or £250 lump sum payment to open an account.

  • Questor's investment tips: stocks, investment trusts and our 5pc Income Portfolio – visit telegraph.co.uk/questor

To access the MetFriendly deal you must either work for the police or be related to someone who does. You must invest in the firm's With-Profits fund, which is made up of commercial property, equities, bonds and cash.

For this Metfriendly will give you an additional guaranteed annual bonus (2pc until April 2020 for amounts invested in 2019/20 tax year), with variable annual bonuses after that including a possible final bonus after you invest for a further three complete tax years.

Because it is a With-profits investment, however, Metfriendly reserves the right to apply a Market Value Reduction (MVR), which could see you get back less than you expected. It charges an annual management fee of 1.76pc, plus transaction charges of 0.12pc and a one-off fee of 0.61pc.

The Foresters Friendly deal has a 1.75pc annual fee and invests in one fund, the firm's With Profits Order Insurance Fund. It is currently offering a £30 M&S Gift Card to new Lisa customers once the 30 day cancellation period has passed.

What sort of investments can I hold in my Lifetime Isa?

A Lifetime Isa will be able to contain any mixture of investments that qualify for either cash or stocks and shares Isas: cash, bonds, shares and investment funds that invest in shares or bonds.

Because this is a separate Isa type, an individual can still have a cash Isa, stocks and shares Isa and/or an Innovative Finance ("peer-to-peer") Isa alongside a Lifetime Isa.

Who offers cash Lifetime Isas?

Skipton Building Society was the first provider to offer a cash-only Lifetime Isa. It has been joined by Nottingham Building Society and Newcastle Building Society.

Nottingham and Skipton both pay 1pc interest a year, while Newcastle pays 1.1pc.

Nottingham will give you fee free mortgage advice when you are ready to buy your house with its Lisa, worth, it says, up to £249, after 12 months.

The Newcastle and Skipton deals can be opened with £1, while Nottingham requires £10.

 

Who accepts transfers?

The following providers allow savers to transfer a Lisa from elsewhere into their own offering; AJ Bell, Moneybox, Newcastle, Metfriendly, Skipton

These companies do not allow transfers in from other Lisa, though they may permit transfers in from different types of Isa; Nutmeg, OneFamily, Hargreaves Lansdown, Nottingham (plans to later this year), Onefamily, Sharecentre

What happens when I turn 40?

If you already have a Lifetime Isa you will be able to continue saving into it and still get the Government bonus up to age 50.

If you're over 40? Tough - you cannot start a Lifetime Isa and will have to save into a pension or a conventional Isa instead.

You cannot make contributions into the Lisa beyond the age of 50, although you cannot access the money until you turn 60.

How do I know whether future governments will stick to the system?

You don’t. That’s another drawback, although it applies to any tax perk.