According to research from One Family, just 6% of those who are eligible to open a Lifetime ISA (Individual Saving Account) have taken the opportunity to do so.
At Choice Mortgage Solutions, we champion anything that could help first-time buyers to get a foot onto the property ladder. However, the low uptake has sparked conversations among MPs who are calling for the Lifetime ISA to be scrapped altogether.
Why is uptake so low?
It is thought that the main reason behind the low numbers of 18-39-year olds opening a Lifetime ISA is a lack of awareness. The research shows that more than half (55%) of people within this age group have either never heard of the Lifetime ISA, or don’t know what it is.
It’s time to change that.
What is a Lifetime ISA?
Available to potential first-time buyers aged 18-39, the Lifetime ISA is a tax-efficient saving account which is designed to help young adults save toward the deposit on their first home. Although you must be under 40 to open a Lifetime ISA, deposits can be paid in until you turn 50.
Withdrawals can be made from a Lifetime ISA without penalty for two reasons: use as a first home deposit or as retirement income after the age of 60. However, withdrawing funds for any other reason will result in a 25% penalty which will not only remove the government bonus, but also eat into the original contributions.
Exemptions are in place in the event of life-limiting circumstances and death.
What are the benefits of using a Lifetime ISA?
Lifetime ISAs have many benefits for first-time buyers, including:
- ‘Free’ money
The Lifetime ISA is government-backed and each year, a bonus equal to 25% of the previous tax years’ contributions is added to the account. With a maximum annual deposit limit of £4,000, you could receive up to £1,000 in ‘free’ money each year. Bonuses are paid each year until you turn 50, which means that someone opening a Lifetime ISA at 18 and paying in the maximum amount for as long as possible could receive as much as £22,000 toward their home deposit or retirement from the government.
- Tax efficiency
Money saved in a Lifetime ISA grows tax efficiently. For example, any interest received on Cash LISA will not be subject to tax. Furthermore, whenever you take any money from the ISA, you will pay no tax, and providing its used for first home or retirement, there will not be penalties either.
- Available in Cash and Stocks & Shares options
The best way to save for different financial goals effectively boils down to the length of time you have to meet them.
Cash ISAs are useful for short-term (generally under five years) targets, as the stability means that the capital value cannot reduce. Although in real terms, it my fall if the interest rate you receive is lower than the rate of inflation or growth in house prices.
For long-term savings goals, a Stocks & Shares ISA could be more effective. This is due to the nature of investments and the risk involved. The stock market is going to see natural fluctuations, and that can include dips and wobbles. However, if you are saving for something in the future, your investments should have time to ride out the uncertain periods, to eventually achieve overall growth.
The Lifetime ISA offers both options, which makes it a good foundation for both home deposit savings and planning for retirement (although if available a Workplace pension is probably preferable). If applicable, you could use a Cash Lifetime ISA to save toward your first home deposit, then convert the account into a Stocks & Shares Lifetime ISA to invest your deposits until retirement.
Nici Audhlam-Gardiner, managing director of Lifetime ISAs at One Family commented: “The Lifetime ISA should be a no-brainer for first-time buyers, as there isn’t a product that competes with it for the bonus you get back on your savings, plus the potential investment returns. First-time buyers can also use it for that all-important house deposit, which is one of the biggest flaws with the Help to Buy ISA, as savings can only be accessed after completion.”
“This research shows that millions of first-time buyers aren’t making the most of the generous bonuses on offer to them at no cost and are losing out on additional returns by saving in cash.”
To discuss whether a Lifetime ISA could be the answer to saving for your first home, please get in touch with us on 0800 612 8099.