Savers looking to open a Lifetime ISA (LISA) are being warned to consider the withdrawal penalty if there is the possibility that they will use the money for any reason other than to buy a first home or for their retirement.
LISAs can be a good way for first-time buyers to save towards a house deposit as these accounts benefit from a yearly 25% Government bonus on deposits. A maximum of £4,000 can be saved into a LISA each year, which means savers able to deposit the maximum amount can get a yearly bonus of £1,000, as well as interest added to their savings. The drawback with these accounts, however, is that there is a hefty 25% penalty on withdrawal of funds for any reason other than to buy a first home or during retirement. This withdrawal penalty not only wipes out the Government bonus, but also some of the deposits made by savers. As such, if there is any possibility that savers who withdraw money from their LISAs, other than for penalty-free reasons, will find themselves financially worse off.
During the pandemic the Government reduced the withdrawal penalty to 20% to assist those suffering financially and who needed to use their LISA savings as a result. A freedom of information request by Quilter, a wealth management business, found that during the 2020/21 tax year, when the LISA withdrawal penalty was 20%, savers had to pay a total of £33 million in withdrawal penalty charges. This compares to the 2019/20 tax year, when the LISA penalty was 25%, which saw a total £10 million paid in withdrawal charges. Since April the withdrawal penalty has increased to 25% again, meaning that some savers could find their deposits penalised if they face financial trouble and have to dip into their LISA savings.
Commenting on the LISA withdrawal charge data, Rachael Griffin, financial planning expert at Quilter, said: “The products are meant to be a hybrid between a retirement savings vehicle and an ISA product for first time buyers. Unfortunately, while the product strives for the best of both worlds it falls short. Lifetime ISAs are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.”
Although interest rates remain low, many saving towards their first home who want instant, penalty-free, access to their savings will find that easy access savings accounts are one of the best options. Savers considering these accounts should note that they usually offer the lowest rates of all savings accounts, but, in return, their savings can be accessed instantly. The top easy access savings rate currently available is 0.50%, which is being offered by seven providers, including SAGA, Virgin Money and Marcus by Goldman Sachs®. As rates on easy access accounts are so low, savers should aim to get the best rate possible and consider switching accounts if a better rate appears in the chart. As well as looking at the rate, when comparing easy access savings accounts savers should be aware that some of these accounts have restrictions on when or how many withdrawals can be made.
An alternative to easy access savings accounts is notice accounts. These accounts are similar to easy access savings account in that they usually allow further additions to be made, allowing savers to build up their savings. These accounts, however, do not allow instant access to deposits, but instead savers have to give a notice period, which can be up to 120 days or more. In return for a notice period on withdrawals, notice accounts often pay a higher rate than easy access savings account. For example, the top notice account rate in the chart today is 0.76% AER being offered by Charter Savings Bank and OakNorth Bank. Savers considering a notice account should be aware that rates can be reduced at any time, which due to the notice period required on withdrawals, means that savers could see their money stuck in an account paying lower than expected rate for a time before it can be withdrawn and moved to a higher paying account.
A risker alternative for those saving for a deposit for their first home is investing in stocks and shares ISAs. A stocks and shares ISA could result in investors earning a higher return on their investment compared to what could be earned via interest on savings accounts, but there is also the possibility that investors will not earn any interest at all and could, in some cases, lose their initial deposit as well. As such, when considering a stocks and shares ISA, it is important to thoroughly research the market first and consider speaking to an independent financial advisor to see if it is the right option. Normally, a stocks and shares ISA is only suitable for those looking to make a long-term investment, usually five years or more. For more information about investing in stocks and shares ISAs read our stock and shares ISA guide.
With house prices at record highs this year and many young people financially hit by the pandemic, it is common for parents and grandparents to help family members take their first step onto the property ladder. These are some of the options available to those wanting to help family members buy their first home:
Equity release – equity release allows older homeowners to unlock equity built up in their home and some of this money could be used to help grandchildren or children purchase their first home. Equity release does have a long-term impact on finances, however, so those considering this option should speak to an independent financial advisor first.
Downsizing – an alternative option to equity release could be downsizing to a smaller, cheaper property. Moving to a cheaper property gives homeowners a lump sum of money that they could pass onto their children or grandchildren to use towards a deposit for their first home. As well as this, moving to a smaller property may help older homeowners to reduce their monthly outgoings as it has cheaper running costs.
Single income joint borrow mortgage – this type of mortgage allows a person with just a single income to buy a property with their parent or grandparent agreeing to make repayments should the buyer fall behind on their mortgage repayments. Unlike a guarantor mortgage, the parent or grandparent does not have to put their home or savings as a guarantee against the mortgage. Speak to our preferred mortgage broker, Mortgage Advice Bureau, for more information about this type of mortgage.
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