Act now to get this £1,000 Government bonus – give your savings a 25% tax-free boost
Martin Lewis advises using Lifetime ISAs for mortgage deposits
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This Government-funded savings top up is a once-in-a-lifetime opportunity. Yet too many people fail to take advantage and could miss out on up to £33,000 in total as a result.
The tax-free Lifetime Isa offers cash incentives help to savers aged from 18 to 39 build a deposit towards their first property, or save for retirement.
Once you have set one up, you can continue saving to age 50 if you wish.
If you contributed the maximum amount every year from age 18, you could get £33,000 worth of free bonuses.
For every £4 saved in a Lifetime Isa, also called a Lisa, the government adds another £1, a bonus of 25 percent.
Savers can pay in up to a maximum £4,000 a year, which would give them a £1,000 bonus.
Anybody who is eligible but does not get round to setting one up is effectively turning down free money from the Government.
You cannot set up a Lifetime Isa for others as a Christmas gift, but you can offer to deposit money as an incentive to do it themselves, said Jason Hollands, managing director of online investment service Bestinvest.
“Only the account holder can open a Lisa but the promise of cash towards a property deposit is often persuasive.”
The money saved must either be used to buy a first property or saved for retirement, when it cannot be touched until age 60, Hollands said. “Withdrawals for any other reason will incur a stinging 25 percent exit penalty, as those Government top-ups are clawed back.”
The Lifetime Isa forms part of the overall £20,000 Isa allowance, rather than coming on top. All income, gains and withdrawals are free of tax. Hollands added: “The value of these tax benefits build over time as your pot grows in value.”
As with standard Isas, you have a choice of saving either in cash or stocks and shares, although provider choice is lower.
Lifetime cash Isas are thin on the ground and rates disappointing: Moneybox pays 0.60 percent while Paragon Bank and Beehive Money pay 0.50 percent.
Lifetime stocks and shares Isas should deliver better returns over the longer run but with more short-term volatility. AJ Bell, Hargreaves Lansdown, Moneybox, Nutmeg and OneFamily offer this option.
First-time buyers can use the money as a deposit on homes up to £450,000, a limit set when the scheme was launched back in April 2017.
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Since then, the average house price has jumped from £219,000 to £273,000, said Laura Suter, head of personal finance at AJ Bell. “As a result, those using a Lifetime Isa to buy their first home face being priced out of the market.”
If the Lifetime Isa limit had increased in line with house prices it would sit at £553,725 today, more than £100,000 higher.
Those buying in London and the south-east are most likely to struggle, Suter said. “Once a property price exceeds £450,000 they are effectively priced out of the market.”
Buyers are also ruled out if they have ever owned a property anywhere in the world, even a part share of an inherited property. They cannot use the money for a holiday home or buy-to-let, either.
The Lifetime Isa is still a great opportunity for younger people to build their savings and get on the property ladder, provided they understand the rules.
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