Welcome to Morningstar. I'm Holly Black. With me
is Laura Suter. She is a Personal Finance Analyst at AJ Bell. Hello.
Hi, there. So, we're talking all things
ISAs, and I think a lot of people get confused about just how many different types of ISAs
there are these days and one of the newer ones is the lifetime ISA. So, how does this work?
I know there's a bewildering array of them now, but yeah, the lifetime ISA is for very
specific reasons. So, predominantly, if you want to save to buy your first property,
or if you want to supplement your pension and retirement savings, so you can open it
if you're between the ages of 18 and 40, and you can save up to £4,000 into it each year.
And then, the government will top that up with a bonus of 25%. So, if you saved that maximum £4,000
in it in a year, then the government will add £1,000 to it and you'll end up with £5,000 to go
towards your first property or you can access it at the age of 60.
So, if I don't use it for a property or wait till age 60, what happens if I take the money
out in the interim period or for something else? So, with the normal ISA, you can withdraw your
money when you want to if you need to dip into your savings where you have (indiscernible) month,
you can dip into it and that's absolutely fine. With the lifetime ISA, you can access that money,
but you effectively pay a penalty for doing so. It was intended to crawl back that government
bonus that you were given, but actually it works as a bit of a tax on your own money.
So, using the example we used earlier, if you'd saved up £4,000, the government has
added £1,000 to it. If you then wanted to withdraw that entire £5,000, you pay a 25% exit charge on
it effectively, which equals £1,250. So, that means that what you end up with is £3,750,
which is obviously less than the £4,000 initial investment you put in. So, people need to be
really careful and not see these as kind of easy access savings accounts. It's longer-term
money locked away for either that pension supplement or for buying your first property.
So, lifetime ISAs, I think because of the property
buying element have been super popular since their launch. But
if you're considering taking one out, what are some of the things you should check first?
So, I think the first really important thing is to make sure that you've got some emergency savings
elsewhere that you can access so that you're not putting all of your savings in a lifetime
ISA. Because that means if you end up in a situation where unfortunately you lose your job or
just a big bill comes in and you need to access your savings, you're going to pay a fee to access
them in a lifetime ISA. So, make sure you've got some money set aside in a cash account first,
then you can start using the lifetime ISA. If you're using it for a first property,
the limit is £450,000 of the value of the property you're buying, regardless of how many
people you're buying that with. So, obviously, that's pretty generous, but in some expensive
cities people might find that they are going above that, and in which case you wouldn't be
able to use it and get the government bonus. And then, if you're saving as a pension,
it becomes a little bit trickier depending on how much you earn. But I think one of the golden
rules is, if you're employed and your employer will give you pension matching, so you put in a
certain amount and they match that, you should use up all of that first because the government
bonus that you get isn't going to be able to beat that money which is effectively free money from
your employer. And then, likewise, if you're a higher rate taxpayer, you're going to get more
in the pension tax relief than you would in the government bonus on the lifetime ISA. But it can
be a really good option for self-employed people, for example, who don't have a workplace pension,
and for some people who are on basic rate tax, it can be a good kind of supplementary account.
Laura, thank you so much for your time. For Morningstar, I'm Holly Black.