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Money blog: This savings account could earn you £8,500 free over five years | UK News
Every Thursday Founder of Savings Champion, Anna Bowes gives us an insight into the savings market and how to make the most of your money. This week, she’s looking at lifetime ISAs.
With inflation falling and savings rates remaining fairly stable, most savings accounts are paying more than inflation.
But if the interest is tax-free and you can benefit from a 25% government bonus on every deposit, that makes the Lifetime ISA (LISA) an even more important savings account to consider if you’re eligible.
In fact, the two main accounts are not offered directly by banks, but are financial applications that use several partner banks, which vary from time to time.
Therefore, you need to do your research to check that opening a LISA with any of the providers will not exceed the Financial Services Compensation Limit (FSCS), which is £85,000 per banking license.
Introduced in April 2017, the LISA offers a much-needed boost to younger savers looking to save for a deposit on their first home or retirement.
The LISA is the obvious choice for anyone aged 18 to 39, as you can deposit up to £4,000 a year and will receive a 25% government bonus on every deposit, which you can keep as long as you use the proceeds to buy your first home – or until you are at least 60 years old as a retirement bonus.
And the earnings are tax-free.
If you deposited a lump sum of £4,000 a year for five years, you would receive a £1,000 bonus the month after depositing – and after five years, assuming an interest rate of 4.40%, which is the best LISA rate in cash on hand, you would have around £28,500 – made up of:
- £20,000 personal deposit
- £5,000 government bonus
- £3,500 tax-free interest
There are also many rules to be aware of with a LISA, so it’s important to know the restrictions as well as the benefits before committing the money.
For example, there is a penalty for withdrawing the money before age 60 for anything other than a first home purchase and the LISA must be held for a minimum of 12 months to avoid the charge.
The fine, if applicable, is 25% of the amount withdrawn.
Although this appears to simply be a refund of the government bonus, in fact it turns out that an extra penalty of around 6.25% will be applied.
Thus, in addition to losing the bonus, part of the money deposited would also be taken.
A LISA can be held in cash or shares.
The most appropriate choice would depend on time frames, with short-term funds typically best held as cash and stocks and shares ISA investments being better suited for long-term (over five years) cash.
Any interest or growth would be tax-free within the Lifetime ISA wrapper.