Lifetime Isa deposits hit £1bn for the first time in 2020

The amount of money saved into Lifetime Isas more than doubled last year as deposits into tax-free accounts aimed at first-time buyers topped £1billion for the first time.

In a sign the Lifetime Isa is becoming increasingly popular, the number of accounts which received deposits in 2019-20 also more than doubled to 545,000, according to the latest figures from the taxman.

In 2017-18, the first full year after the account was announced by then-Chancellor George Osborne, just £486million was saved, according to HMRC’s figures.

The Lifetime Isa is aimed at first-time buyers and offers up to £1,000 in ‘free’ money a year

The account is open to anyone under the age of 40 and up to £4,000 a year can be saved into it.

The Government tops up any deposits by 25 per cent, meaning savers can benefit from up to £1,000 of ‘free’ money.

With £1.255billion saved in 2019-20, it means accountholders would have been handed £313million in bonuses from the Government. 

However, there are several catches and these, plus the somewhat complicated nature of the account, means it is still yet to see widespread adoption.

But with the average Lifetime Isa deposit per person £2,303 in 2019-20, it suggests those who have saved into one have benefited from around £400 each, putting away £1,900.

And the fact the average deposit per saver fell by around £400 compared to 2018-19 also suggests the account is becoming more popular, as it is less limited to those putting away the maximum £4,000.

The accounts have likely continued to grow in popularity in the most recent 2020-21 tax year.

Moneybox, Britain’s largest Lifetime Isa provider with more than 250,000 accounts, told This is Money earlier this year it was on course to pay out more as much as £130million in top-up bonuses to its customers, which would be a record.

Lifetime Isa savings top £1bn for the first time 
Year  Number of accounts paid into  Value of deposits saved  Average annual deposit per person 
2017-18 154,000 £486m  £3,156 
2018-19  223,000  £604m  £2,709 
2019-20  545,000  £1.255bn  £2,303 
Source: HMRC 

Maitham Mohsin, head of savings at Skipton Building Society, the country’s second-largest provider, said: ‘We’ve seen continued growth in demand for our Lifetime Isa as people aspire to make their dreams of home ownership a reality.

‘Just before the end of the tax year, Skipton saw new accounts opened and funded with nearly triple in volume, as new customers put in significant opening balance amounts to ensure they didn’t miss out on 2020’s bonus from HMRC. 

‘We also noticed a trend with existing customers topping up their balances, with more than £200million of inflow into our Lifetime Isa product in the three months since February 2021 and with more than £30million of Lifetime Isa bonus from the government.’

Both cash and stocks and shares options are available. Moneybox pays the top rate on a cash Lifetime Isa, with interest paid at 0.85 per cent. Nottingham Building Society pays 0.8 per cent and Paragon Bank 0.5 per cent.

Stocks and shares Lifetime Isas are offered by investment platforms like AJ Bell, Hargreaves Lansdown, Moneybox and Nutmeg. 

Like with any investment product, investors should be careful how platform and investment charges eat into their returns.

Anyone with Lifetime Isa savings can put them towards a first-home worth up to £450,000 after having the account for 12 months.

In March This is Money reported on how 4,991 homes were purchased in the most recent tax year with the help of a Moneybox Lifetime Isa, with Bristol the most popular spot for first-time buyers.

With house prices hitting record levels and spiralling over the last 12 months, more and more young people are in need of help to get on the housing ladder. 

Alternatively, they can be used for retirement after the holder turns 60.

Despite the benefits of the account, which mimics basic rate pension tax relief and can be a useful retirement vehicle, this complexity and marriage of different savings goals has led to calls for the account to be scrapped.

And most importantly, withdrawals for any other reason incur a 25 per cent penalty. 

This means not just the bonus, but some of the actual accountholder’s savings are taken as punishment.

Although this penalty was lowered to 20 per cent for a year in April 2020, due to the pandemic, the Treasury said it had no plans to do it again or lower it permanently, despite the calls from providers like Moneybox and other financial campaigners.

In response to the new HMRC figures, Anna Bowes, co-founder of the website Savings Champion, said: ‘It’s great to see that young savers seem to have really caught on to the benefits that saving into a Lifetime Isa can offer.

‘The 25 per cent bonus can give first-time buyers a real boost to the deposit they are saving and even those who don’t qualify for this aspect could find it is a useful additional investment to help in retirement, when they reach the age of 60.’