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Martin's first-time buyer LISA allowance warning

This is a warning for all first-time buyers – there’s just one month left for you to use this tax year’s Lifetime ISA allowance. It resets on 6 April, and if you miss it you could lose out on a potential free £1,000 bonus. Don’t worry though, our Money Saving Expert Martin Lewis is here to help you through it…

What is a Lifetime ISA (LISA)? LISAs launched in 2017, and they were a replacement for its Help to Buy ISA predecessor cousin (more on H2B ISAs below).It’s a tax-free savings product which lets you save up to £4,000 per tax year, which ends on 5 April. For detailed info see Martin’s full Lifetimes ISA and best buys guide, but in brief…

It’s for first-time buyers... As long as you’ve never owned, or part owned a home (in any way) you can use the money as a deposit for a mortgage towards any residential property that costs up to £450,000.

… or for retirement savings. The money and bonus can also be taken out once you hit age 60.

You get a 25% bonus on everything you put in. For every pound you contribute in a year, the state will add 25%, until you’re 50. So, if you save £1,000 you'll have £1,250, and if you save the full £4,000, you'll have £5,000. That means if you fill this years now, and you had another £4,000 to save you could put that in on the 6 April – so you’d have £8,000 in by then.

There’ll be a penalty if you withdraw cash for anything else. You can withdraw the money for anything else, whenever you want, but there will be a 25% penalty (remember you’ve already been given a 25% bonus). The maths works out that for every £100 you put in, you get £93.75 back, so only put in money you know you’ll use for a qualifying home buying or retirement.

Can anyone open one?

No, that’s the rub, you must be aged between 18 and 40 to open it. If you’ve had your 40th birthday already, you’ve missed out, but open it before you’re 40 and you can keep it after. The bonus is then paid until you’re 50. So open at 18, and get the full 32 years of the maximum bonus and that’s £32,000 free (assuming the rules don’t change).

Plus, there’s a rule that says to use the bonus for a home, you need to have had it open for at least a year. So, putting at least £1 in there now gets the clock ticking on that year, so that if and when you do have money to put in it, and want to buy a house quickly, you’re ready to go. Of course, if you can save more, then do.

What are the top lifetime ISAs?

There are two types of LISAs. Cash LISA and Stocks and Shares LISA. There aren’t many top cash LISAs to choose from, as not many providers offer them, but top is app-based MoneyBox which pays 1.4% AER (your cash is actually saved with OakNorth Bank) and then it’s Nottingham BS paying 1.25% AER.

Stock and Shares LISA providers include Hargreaves Lansdown, AJ Bell YouInvest and Nutmeg – though remember with these you’re taking a risk and these are far less suitable for most short time buyers who won’t want the money in for that long.

If you can’t get a LISA (too old, say), what should you do?

If you opened a Help to Buy ISA before they closed for new applications in November last year, you can keep saving in it till Nov 2029 and use it for the 25% house bonus till December 2030. If not it’s a question of just putting your money in the best savings accounts. For regular saving you can put up to £500/month in the Coventry Building Society regular saver earning 2.5% AER. Or, for lumps with easy access there’s Marcus and Saga at 1.3% AER.

Are LISAs better than a pension for retirement savings?

That’s a complex question, but for most people, no. While unlike pensions it does allow early withdrawals (for a penalty) in most cases a pension gives you more. This is because with a pension, you usually save from gross (pre-tax) income – which for basic-rate taxpayers is a bit like a 25% boost in its own right, the same as a Lifetime ISA. For higher-rate taxpayers it’s like a 66% boost, which smashes the Lifetime ISA.

Plus, if you’re employed, the auto-enrolment scheme means that if you save into your pension then your employer has to as well, which you don’t get from the Lifetime ISA.

So in simple terms the only time the Lifetime ISA even matches pensions is for basic-rate taxpayers who are self-employed. Even then, the Lifetime ISA, unlike a pension, counts as savings, so it can diminish your benefit entitlement. Therefore, for most people the Lifetime ISA should only be used at best as a secondary way to save for retirement.

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