Is a Lifetime ISA for you?

Is a Lifetime ISA for you?

More and more people are taking advantage of the benefits that come with a Lifetime ISA, especially those aged 30 and over, according to AJ Bell.

Two thirds (66%) of people who have opened a Lifetime ISA since April 2017 have been aged between 30 and 40, of these:

  • 45% were between 36-39
  • 17% were aged 39

Why Lifetime ISAs?

Lifetime ISAs attract a government bonus of 25% on amounts of up to £4,000 invested each year, until the account holder turns 40. So, it is no surprise that investors are taking advantage of that bonus in the years before it is no longer an option.

But Lifetime ISAs are available to anyone over the age of 18, so why are there so few 20-somethings making the most of the years of government bonuses available to them?

There are three possible reasons:

  • People aged 30-40 are earning more than they were in their 20s and are therefore able to save a more substantial amount, which makes the government bonus even more appealing
  • They simply may not have heard of a Lifetime ISA, or know of the benefits available
  • 20-somethings may not feel confident in their ability to manage investments

With the latter reason, people in their 20s need not worry. 46% of savings held in Lifetime ISAs are simple cash deposits (and usually these will be the people saving toward a deposit on a house).

Other methods of saving and investing are less popular, with:

  • 29% held in funds
  • 13% held in stocks
  • 7% held in Exchange Traded Funds (ETFs)
  • 6% held in investment trusts

Which just goes to show that you do not need to be a whizz with stocks and shares to benefit from a government bonus on your savings each year.

Should you consider a Lifetime ISA?

Are you:

  • Aged between 18 and 40?
  • Saving towards a deposit to buy a house?
  • Able to save up to £4,000 per year?

If you answered ‘yes’ to all of those, then a Lifetime ISA could be the right product for you.

A Lifetime ISA allows you to save up to £4,000 each year, which forms part of your annual tax-free ISA limit (which is £20,000 for 2017/18). The government bonus is equal to 25% of each contribution, meaning that you could receive an additional £1,000 each year, if you deposit the maximum amount. This bonus is awarded each year until you turn 40, so the earlier you start saving, the more you will see the benefits.

In essence, a Lifetime ISA is a tax-free savings account, which entitles you to extra money from the government and helps you save to buy a home, or to live a better life in retirement.

You’re probably wondering what the catch is.

The only downside to a Lifetime ISA is that the government bonus stops when you reach age 40. However, you can continue to save money in the account on a tax-free basis until you reach 50, up to £4,000 each year. So, even if you don’t quite have enough for the deposit on your dream home by then, you can continue to build on the foundation savings that you (and the government) have built up for you.

It’s a no-brainer, if you’re saving for a house deposit.

If you’re looking for a retirement plan, however, a workplace pension is a better option.

For advice on savings accounts and pension plans, talk to us.