MILLIONS of first-time buyers are missing out on an account that automatically tops up savings with £1 for every £4 you put away.
New figures from HMRC show that just 230,000 people have opened a Lifetime ISA, despite the accounts being available for anyone between 18 and 40.
In 2018, there were over 17.5 million people in the UK in the right age bracket to access an account, which suggests over 17 million people are missing out on their free government bonuses.
On average, the people who did open accounts received top ups from HMRC worth £677 each year.
What is a Lifetime Isa?
The Lifetime Isa (Lisa) accounts are designed to help young people save either for a first home or for retirement.
To do this, the government automatically gives you £1 for every £4 you save – up to a maximum of £1,000 in top ups.
The limit renews each year, and you’re allowed to keep saving until you are 50.
That means that someone who opens an account on their 18th birthday and saves the maximum of £4,000 each year until they were 50 would get a whopping £32,000 in free government cash.
It’s worth having an account even if you can’t afford to save the maximum, because you’ll still get a proportional bonus from HMRC.
So if you saved just £600 (or £50 a month) the government would add £150 to your savings.
There are some strict rules for how you can use the money – and you have to pay a penalty if you break them.
The money must be used to either buy your first home, or for when you retire.
If you use it to get on the property ladder, the house you buy must cost less than £450,000.
If you’ve decided to use the money for retirement, you aren’t allowed to touch it until you reach age 60.
Once you have turned 60, you can take the money all at once or in installments and you can spend it on whatever you like.
Even better, you won’t pay any tax on your cash, unlike with traditional pensions.
If you take the money out for any other reason, you have to pay a penalty.
HOW THE LIFETIME ISA PENALTY WORKS
ANYONE who withdraws money from their Lisa but doesn’t use it for a first home or retirement has to pay a penalty charge
Usually this penalty is 25 per cent, meaning you lose the government top up and a bit extra from your savings.
For example, if you had saved £800, the government would add 25 per cent, meaning your pot would be worth £1,000.
If you choose to withdraw the money (except for a property or retirement) the government would take 25 per cent of the £1,000.
That works out at £250, so you’d be left with just £750, which is less than you put in.
However, the government has temporarily changed the rules because of the coronavirus crisis.
Anyone who needs to dip into their money at the moment only has to pay a 20 per cent penalty, which means that they will only lose the top up, not any of their original savings.
The penalty rate is currently set to return to 25 per cent from April 2021.
How to open a Lifetime ISA
If you want to save for a first home or for when you retire, the Lifetime Isa is a good option.
You can open one with some building societies as well as with savings platforms such as Nutmeg or AJ Bell.
There are two main options, you can either open a Cash Lisa, where you will be paid interest on your savings or you can open a Stocks and Shares Lisa where you will see investment returns.
If you choose a Cash Lisa you need to shop around to find the best interest rate available.
At the moment, there are five providers offering Cash Isas.
Nottingham Building Society is the best option as it currently pays 1.25 per cent interest.
Alternatives are Moneybox (1 per cent), Paragon (0.75 per cent), Newcastle Building Society (0.35 per cent) and Skipton Building Society (0.35 per cent).
A Stocks and Shares Lisa should give you better returns than a cash one over the long term, but because your money is invested it can go down as well as up.
You can choose different investment approaches depending on your ‘investment risk appetite’.
Most of the platforms will get you to do a quiz to help you work out the right levels.
They then do all the work for you, choosing which stocks and shares to invest your money in.
The providers currently offering Stocks and Shares Lisas are: AJ Bell, Forrester’s Friendly Society, Hargreaves Lansdown, Nutmeg, Moneybox, One Family, The Share Centre and youinvest.co.uk.
Top tactics to help your money grow from savings accounts to surveys.
Brits saving more than ever as coronavirus crisis curbs spending.
Did you know lockdown could add up to £792 extra to your household bills? We reveal how to slash costs.