- The Lifetime ISAs allow investors to save £4,000 a year without any tax on it.
- There are four types of ISAs that include Stocks and shares ISAs, Cash ISAs, Innovative Finance ISAs, and Lifetime ISAs.
Individual Savings Accounts (ISA) is a tax-free government-backed savings and investment account, with a £20,000 maximum allowance for the tax year 2021-22 and 2022-23. This is the maximum amount a saver is allowed to save in their ISA account in a tax year. The ISAs were introduced to encourage Britons to save more each year. In case, an ISA account holder does not use its annual ISA allowance before the end of each tax year, they will lose it and a new one will start from the new tax year. ISA allows you to pay less on taxes and save more money to stays in your pocket.
Individual Savings Accounts can be classified into four categories: Stocks and shares, Cash, Innovative Finance, and Lifetime ISAs. All these have different aims and specific rules.
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What is Lifetime ISA?
Lifetime ISA is the newest ISA added for the savers, which is essentially a government-backed savings scheme for all between 18 and 39 years of age. The account allows you to save £4,000 a year tax-free for buying your first home or for retirement, but this is included in your £20,000 ISA limit for 2021/22 tax year. The states add £1 for every £4 (25%) to a maximum of a cash bonus up to £1,000 a year until the saver is 50 years. The cash bonus is paid every month so that you can get compound interest on it.
If you want to withdraw your contribution for any other reason except you are 60 aged, want to buy your first house, transfer your lifetime ISA account to another provider or you are terminally ill with less than 12 months to live, then you will have to pay a penalty of 25% of the amount withdrawn.
How is the cash bonus paid?
HMRC is responsible to calculate bonus payment for any payment an account holder makes from the 6th day of the month to the 5th day of the following month. However, it’s a good idea to check how your provider treats your bonus payment as some may automatically reinvest the amount and some may put the amount into non-interest earning cash accounts. So, to not miss out on future growth or interest in your invested fund keep an eye.
Types of Lifetime ISAs
- Investment Lifetime ISAs (Stocks and Shares Lifetime ISAs)
The Investment Lifetime ISA contributions can be invested in a range of stocks & shares and investment funds, so it carries more risk than holding your contribution in cash as its value depends on the investment it has made. Therefore, Investment Lifetime ISA can be held for the longer term.
- Cash Lifetime ISAs
The Cash Lifetime ISAs contributions are held in cash that earns interest, with the benefits of tax-free return and a 25% bonus from the government.
However, if you are making Lifetime ISA contributions to buy a house in a few years then cash lifetime ISA is considered to be the best option as it offers regular interest.
But if you are looking to use it to save for retirement, it’s better to choose Investment Lifetime ISA if it suits you.
Also Read: What are the best Cash ISA rates right now?
Let us look at the 5 best Lifetime ISAs that you may consider investing in.
- Moneybox Lifetime ISA
The Moneybox cash Lifetime ISA offers an interest rate of 0.85% AER (variable), including a 0.25% variable base rate, and a fixed one-year bonus interest rate of 0.6%. One can open an account with just £1 and there are no fees, this account holds savings of depositors through third-party banks, which are covered under the Financial Services Compensation Scheme. This means up to £85,000 of your savings will be protected.
The saver may use this account to buy a property of up to the value of £450,000 anywhere in the UK, but the account must open for at least one year before the withdrawal. If the withdrawal is made for other reasons, barring buying the first house or retirement, the account holder will be charged around 25% on the amount of withdrawal.
Beehive Money Lifetime ISA
Beehive Money is a part of Nottingham Building Society and offers two-lifetime ISAs: Homebuyer Lifetime ISA and Retirement Lifetime ISA. Both ISAs pay a 0.5% interest rate annually. But first savers need to make a minimum initial deposit of £10 when opening an account from its app. If a saver has a Lifetime ISA and has already saved a minimum of £10,000, they may get £50 cashback for transferring Beehive Money. However, Retirement Lifetime ISA does not allow transfer and there’s no cashback offer either.
Nude Lifetime ISA
Nude lifetime ISA was rolled out gradually at the start of 2021 as part of the Nude app that allows savers to get tips on their savings for their first house, connect with their bank and allow them to save jointly with their partner. The account pays an interest rate of 0.5% variable AER, including the 25% government bonus, but it required a £25 minimum initial deposit.
The account holder needs to give 95 days’ notice before making a withdrawal and it also charges £2 a month to use the features in the Nude app. The saver can’t make this back at the current rate of interest unless they had saved a minimum of £4,800 in the account.
Also Read: How does inflation affect interest rates?
- Paragon Bank Lifetime ISA
Paragon Bank Lifetime ISA can be opened with just £1 and offers an interest rate of 0.5% variable APR. The account can be opened online and can be managed online, by telephone, or post. The account also accepts a transfer from another Lifetime ISAs and is available nationwide for all age groups. Savers can deposit from £1 up to their cash lifetime ISA allowance of £4,000 a year and they can also pay into cash lifetime ISA up until the day before they turn 50.
Savers can withdraw but will incur a 25% government charge if the money is used for another purpose than any government saving scheme.
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Newcastle Building Society Lifetime ISA
Newcastle Building Society’s Lifetime ISA offers an interest rate of 0.50% AER with a 25% government bonus and the account can be opened with a £1 minimum initial deposit. The account can be opened and managed online, and it is available nationwide. Newcastle’s Lifetime ISA can be managed online, by post or telephone, and payments into this account can be made by cheque or directly from another UK bank or building society.
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