The Government kicked off Lifetime Isas in April last year but just five providers have since launched a deal – so is the Lifetime savings account a flop or should you open one?
The Lifetime Isa allows you to save up to £4,000 a year if you’re aged between 18 and 39 until you reach the age of 50. Every year, the Government will boost whatever you put in by a whopping 25 per cent, up to a maximum of £1,000 for free every 12 months.
There are several catches, the biggest of which is that in order to qualify for the bonus payments, you must use the savings either to buy your first home or for ‘later life’ – in other words, to help fund your retirement.
The Lifetime Isa seems like a no-brainer for would be homeowners
Leaving aside the latter – it makes far more sense to save into a pension as the tax relief is better – the Lifetime Isa seems like a no-brainer for would be homeowners.
If you saved £4,000 towards a deposit into the best buy easy access cash Isa, which is currently from Sainsbury’s Bank and pays a rate of 1.15 per cent, at the end of the year you’d have earned just £46.24 in interest over 12 months.
By comparison, saving the same amount into the Lifetime Isa would see you earn £1,020.05.
It’s for this reason that investing app Moneybox is the latest provider to announce it will offer a Lifetime Isa; rather than pitch it as a way to save for retirement though, the app’s founders are aiming it at those saving a deposit for their first home.
Estimates from the Office for National Statistics suggest there are around 8 million potential first-time buyers in the UK, yet of those, Moneybox claims, just 1 per cent have opened a Lifetime Isa.
‘We think the Lifetime Isa offers a fantastic opportunity for almost all first-time buyers,’ says Ben Stanway, co-founder of Moneybox.
‘With an annual bonus of up to £1,000 per year, it could give people a real headstart towards their first home.’
What is Moneybox offering?
First things first, you’re not comparing apples with apples here.
MoneyBox is a mobile app targeted at millennials. It allows you to round up your small, everyday card purchases and put the extra change into a stocks and shares Isa.
Say you spend £2.55 on your morning coffee. Moneybox will round that up to £3 and put the 45p into your investment account. You can also set up fixed weekly contributions.
This means Moneybox’s Lifetime Isa is an investing Isa, making it the fourth one to launch alongside those offered by Hargreaves Lansdown, the Share Centre and Nutmeg.
Skipton Building Society’s Lifetime Isa remains the only cash version of the account.
Essentially Moneybox’s new deal works in exactly the same way as its existing investing Isa, offering tax-free returns but with the added 25 per cent bonus from the Government of up to £1,000 a year.
When you sign up, they offer you a choice of three risk-rated portfolios – cautious, balanced and adventurous. They give you exposure to cash, global equities and global property equities through three passive funds run by Henderson Asset Management, Vanguard and BlackRock.
The portfolios offered by MoneyBox contain different allocations of the same three funds. Fund selection is reviewed annually, and adjusted at the end of of every year if necessary.
How does it compare?
All the investing Lifetime Isas on the market are essentially the same – which one you opt for comes down to how you want to invest your savings.
Moneybox lets you start saving with just £1. It charges £1 a month to cover transaction fees, although the first three months are free to new subscribers. It also charges a platform fee of 0.45 per cent. This fee accrues daily but is charged monthly by selling down your largest holding.
Investors pay fees for the tracker funds on top of this, which range from between 0.22 per cent and 0.24 per cent per year and are incorporated into the daily fund valuation.
Moneybox’s investment offering is pretty straightforward without the bells and whistles you might get from Hargreaves Lansdown for example. They don’t offer investment advice and won’t send you research into hundreds of different funds.
Depending on how much you invest and what funds you choose, Moneybox costs about the same as Hargreaves Lansdown and Nutmeg’s simple service. The Share Centre is just marginally more expensive.
>> Compare the best and cheapest DIY investing platforms now
This is Money verdict
As far as investment Lifetime Isas go, the Moneybox one is great because it’s no hassle, low cost, regular saving managed automatically.
You also don’t have to be saving thousands of pounds in order to get started.
But it’s not really about comparing it to the other Lifetime Isas on offer. It’s more helpful to compare it to other accounts that might fulfill your needs better.
In order to decide, you need to think about why you’re saving, how much and over how long.
Short-term to buy a house
If it’s to buy a house soon, you might think you’re better off keeping your money in cash as investment values can fall as well as rise in the short term.
In this case you could opt for the Skipton cash Lifetime Isa as 52,000 others have over the past six months. This is because you know you won’t lose money if the stock market falls before you need to access it for your house purchase.
However, it pays a measly rate of just 0.5 per cent. Inflation is currently running at 3.1 per cent so in real terms, your money will lose value making this a less sensible option if you’re not planning to withdraw your savings for a few years.
There are also other accounts offering a bonus from the Government.
The Help to Buy Isa has been around for longer than the Lifetime version and also pays a Government bonus of 25 per cent on contributions up to £12,000.
It offers a best buy rate six times that on offer from Skipton BS. Currently, Penrith Building Society is offering the best deal with an interest rate of 3 per cent.
If you save £4,000 into this Help to Buy deal, after a year you’ll have earned £1,121.66, making it a better bet than the only Lifetime cash Isa on offer at the moment.
But, the amount you can claim from the Government is capped at £3,000 meaning if you want to save more than £12,000 into the Isa, you can, but you’ll stop receiving the bonus after you reach £12,000.
Saving more than £12,000
The Lifetime Isa meanwhile pays the Government bonus on savings contributions up to £4,000 a year with that allowance renewing each year until you’re 50.
If you’re determined to save into a cash account, it may therefore make sense to open a Help to Buy Isa first in order to benefit from the higher interest rates on offer – especially given the average deposit needed by a first-time buyer is now in excess of £30,000.
If, after three years, you reach the £12,000 threshold, you could then open a Lifetime Isa to ensure you keep collecting the 25 per cent bonus.
Long-term to buy a house
Stock markets can be volatile but tend to rise over a longer term horizon
If you know realistically it’s going to take you longer than three years to save for your deposit, then investing might make more sense than keeping your money in cash.
Typically the experts will tell you not to invest if you need your money back within three years minimum, and five years is a more sensible time horizon.
This is because stock markets can be volatile and you may see the value of your savings go down before it goes up. Over a five-year period however, history suggests that it’s likely to go up.
There’s also the added advantage that, if you reinvest the income from your investments, your savings benefit from compounding.
Explained simply, compounding is the effect of reinvesting dividend income. Say you earn 5 per cent on £4,000 invested over a year. At the start of the next year, you have £4,200 to invest. If you earn 5 per cent again, instead of earning the same £200 you did in year one, you earn £210, bringing your total investment to £4,410.
This effectively allows you to grow your savings much faster as you earn interest on interest over time – provided that the stock markets rise.
To see how compounding can grow your money use our calculator here.
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