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

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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. 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 1.25pc until the new tax year, when it will fall to 1pc. It also offers free life insurance cover of up to £5,000 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. AJ Bell and Hargreaves Lansdown permit savers to hold their money in cash although AJ Bell doesn't pay interest on balances under £50,000.Those with more will earn just 0.05pc - the same rate offered by Hargreaves Lansdown 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. The only fees you pay are fund charges of between 2pc and 2.21pc, although these are on the high side. Nutmeg charges 0.75pc on investments of up to £100,000 for its fully managed portfolio range, and 0.45pc for its "fixed allocation" portfolios. Additional fund charges also apply of 0.19pc and 0.17pc 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. It offers three tracker funds from asset managers Henderson, BlackRock and Vanguard that track the global stock market, property 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, and you must invest in one of its two own funds. 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. There is an annual management charge of 1.76pc. The Foresters Friendly deal has a 1.25pc annual fee and invests in one fund, the firm's With Profits Order Insurance Fund.

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. The Newcastle and Skipton deals can be opened with £1, while Nottingham requires £10. he Nottingham deal is currently limited to those who live in the areas the building society has branches. Neither the Nottingham or Newcastle deals allow you to transfer other Isas into your Lifetime Isa, though both plan to allow this in the future.

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.

Posted by MMB Finance Swindon and Gloucester on 14 November 2018