Imagine saving up to £4,000 per year toward buying a house or for a more comfortable retirement.
Imagine the government giving you a 25% bonus on your contributions each year until you turn 40.
Imagine paying no tax on those savings.
It sounds good, doesn’t it? It’s called a lifetime ISA (Individual Savings Account).
What is a lifetime ISA?
It’s everything we said above and more. A lifetime ISA:
- Is available to anyone between the age of 18 and 39.
- Can be used to save a maximum of £4,000 each year, which forms part of your annual ISA allowance (currently £20,000 per year)
- Receives a 25% bonus on the amount saved each year (that’s a potential £1,000) until the holder reaches the age of 40
- Is tax-free
Who has one?
According to AJ Bell:
- 66% of lifetime ISA holders are over the age of 30
- 45% are between 36 and 39,
17% of people over the age of 30 who have opened a lifetime ISA this year, are already 39 years old. It’s hardly surprising that these people want to take advantage of the benefits before their 40th birthday. But it also shows that, if it’s such a tempting offer for those who will benefit for the least amount of time, it must be a great deal for those with ten or twenty years of bonuses ahead of them.
How are lifetime ISAs being used?
Lifetime ISAs can be used for many types of investment including cash, stocks, shares and investments. There are different products available to suit all types of investment. Cash currently accounts for 46% of holdings, whilst the remaining 54% are investments:
- Funds make up 29%
- Stocks total 13%
- Exchange-traded Funds account for 7%
- 6% is formed of investment trusts
This shows that even those who are not confident in dealing with stocks, shares and other investments can still use a lifetime ISA to invest cash deposits. Cash deposits are so popular because those who are saving to buy property are less likely to choose investments which could fall in value.
Be an early bird
The average amount saved in ISAs this year is £2,520. That amount will attract an additional £630 from the government bonus. That’s a welcome boost for anyone saving to buy a house or live a more comfortable life in retirement.
The best-case scenario is that of an 18-year-old who opens a lifetime ISA and saves the maximum of £4,000 each year until they turn 40. They would save £88,000 of their own money and receive a total of £22,000 in government bonuses, for a total of £110,000. This could then be used to buy a home, or to form part of a pension or retirement fund.
For people looking to save toward buying a house before the age of 40, an Isa is a no-brainer. But for those saving solely for retirement, looking into employer pensions should be more of a priority, as employer contributions add up faster than the ISA bonuses.