All you need to know about the new tax-free savings scheme to help you buy a home or retire
SAVERS are set to see major changes in just under a fortnight with the launch of the Lifetime ISA (LISA) – plus an increase in the overall limit for ISAs.
The LISAs, which will launch on April 6, are tax-free vehicles designed to help younger savers build a deposit for their first home or for a retirement pot.
Those aged between 18 and 40 can save £4,000 a year into a LISA and the Government will top up contributions by 25 per cent — that’s £1,000 per year if you save the full £4,000, until the saver reaches 50.
As with ordinary ISAs, you can put your money in either cash or stocks and shares.
First-time buyers can get access to some — or all — of their money when they need it if they use it to purchase a property worth up to £450,000.
If you don’t use the money as a deposit on your first home, you can take it tax-free and penalty-free to fund your retirement — but only when you turn 60.
While you may like the sound of LISAs, experts are warning that anyone thinking of saving in one of these products must be cautious and understand the pitfalls.
Also on April 6, the overall ISA limit will increase from £15,240 up to £20,000, meaning you can save much more tax-free.
This limit includes all payments into a cash ISA, stocks-and-shares ISA, LISA and another type known as an innovative finance ISA.
Hannah Maundrell, finance expert from , says: “Once again, this may sound like good news, but in reality, many people won’t have anywhere near enough in savings to benefit from the higher allowance — plus the rates on cash ISAs are not very competitive.”
Here we take a closer look at both LISAs and ISAs.
New lifetime ISA
BANKS AREN’T ON BOARD: New findings from Which? reveal that, with only weeks to go until the planned launch of LISAs, banks and building societies have yet to confirm they are ready to offer them.
At the same time, only a handful of stocks-and-shares ISA providers say they will offer the investment version of the lifetime ISA from day one.
The delays have been blamed on the slow release of guidance from HM Revenue and Customs.
BEWARE OF THE EXIT PENALTY: First-time buyers using the LISA to buy a property can take all the money out with no charge and no tax to pay. But you need to be aware that if you want to withdraw the money before 60 for any other reason, you will be hit with a 25 per cent exit penalty.
LISA tips
If you don’t want to risk the stock market, you may be better off waiting until banks and building societies launch cash accounts.
If your home purchase is less than five years away, cash is the sensible option.
If more than five years, stocks and shares offer the potential for higher returns. However, there is greater risk to capital.
Note that employers are not able to contribute to a LISA.
If you are employed and saving for retirement, you should look at a workplace pension first where your employer also contributes.
As a first-time buyer, you should not view the LISA as an alternative to a pension.
YOU CAN’T ACCESS A LISA UNTIL YOU ARE 60 IF TAKING IT AS RETIREMENT INCOME: If you are not using the money for property, it will be trapped until you are 60, whereas you can get access to money in pension funds from 55.
Neil Adams, of pensions adviser Drewberry Wealth, says: “Don’t make the mistake of making a LISA your sole retirement vehicle.”
DON’T VIEW A LISA AS AN ALTERNATIVE TO A PENSION: If you decide to start saving in a LISA for your retirement, you may be tempted to opt out of a workplace pension.
However, Tom Selby, from investment specialist AJ Bell, says: “Under auto-enrolment, all employers will eventually be required by law to match your first three per cent of contributions, and many will offer an even better deal than this.
“Giving up this free money, which is way more generous than the LISA Government bonus, could have a very negative impact on retirement savings.”
New ISA allowance
MAKE FULL USE OF YOUR ISA ALLOWANCE: ISAs have long been the go-to choice for saving, as you can use them to shelter money from tax.
However, the usefulness of cash ISAs changed with the introduction last April of the £1,000 Personal Savings Allowance.
Jason Hollands, from financial adviser Tilney, says: “Cash ISAs have arguably been eclipsed by the new tax regime for savings.
“Basic-rate taxpayers can now earn their first £1,000 of interest tax-free.
“That’s an awful lot of cash you can hold before worrying about tax on interest.” It’s been a slow start to the ISA season, with average rates falling and little competition.
ISA tips
Once you’ve set up a cash ISA, make a note to review the account from time to time to check the rate is still competitive.
If you have old ISA accounts, check the rate to see if you should transfer it to a new account.
Useful sites for comparing rates on include Moneyfacts.co.uk and Savingschampion.co.uk.
If you are transfering an ISA, make sure you follow the correct procedure to ensure the savings don’t lose their tax-free status. Contact the ISA provider you want to move to, and they will transfer for you.
But experts still believe savers should make use of these vehicles.
Rachel Springall, from , says: “It’s worth remembering the Personal Savings Allowance might not be around over the long-term.
“You also need to realise that ISAs are beneficial for the long-term tax advantages – especially now that the tax-free allowance is set to rise to £20,000.”
If you are looking to make use of your current ISA allowance, you need to act fast before the end of the tax year on April 5 – if you don’t use it, you lose it.
GET THE BEST RATES YOU CAN: At present, you can get 1.05 per cent on an easy-access ISA from Coventry Building Society and 1.1 per cent on a one-year fixed-rate ISA from Bank of Cyprus UK.
If you are looking for better returns than those offered by a cash ISA, however, you may want to consider an investment ISA.
But you need to bear in mind that stocks-and-shares ISAs are for the long-term and they come with higher risk to your capital.
Parent power
NATIONWIDE has launched a mortgage to help parents get their children on to the property ladder.
Mums and dads who have paid off a good amount of the money owed on their property while its value has risen can remortgage and hand the equity to their kids.
Nationwide’s Henry Jordan said: “Our Family Deposit mortgage range helps first-time buyers and home movers.”
Barclays also offers a deal aimed at parents looking to help their children. Its Family Springboard mortgage requires a “helper” to put up ten per cent of the purchase price.
Cash hack
FILM and telly fans can get a three-month Now TV pass for the price of one month until midnight on Thursday.
An Entertainment and Sky Cinema pass worth up to £50.94 is on offer for £16.98. Go to nowtv.com/tv-passes.
Help me find an affordable festival
HELEN SMITH, from East London, wanted to know how to bag cheap tickets for a summer festival. She says they are too pricey.
Here are our readers’ tips:
I WORK as a steward at a couple of festivals in the summer. You get free entry and camping, and get fed and watered for your trouble.
STRANG, North London
SOME festival tickets have doubled in price over recent years. It’s a total rip-off. Just go on holiday for the same price.
SHELLIE, Durham
GO abroad to festivals like Benicassim in Spain. They are cheaper, and you can combine a gig and a holiday.
TIM, South London
CHECK out Gumtree and eBay for unwanted tickets. Sometimes people can’t go and sell them at the last minute for a low price.
PARIK, Slough, Berks
THERE are tons of small festivals that don’t cost much all around the UK. Some are are even free. Check these out online at .
HEIDI, Colchester
NEXT WEEK: Could you help Sam Green from York? He wants to hire a cheap car for a holiday in Italy. How can he get the best deal and avoid being ripped off?
Send your ideas to mrmoney@mcb777.fun, remembering to put “Readers Rescue” in the subject box of the email.
Cash hack
CHAMPNEYS has some top offers for daughters treating mums on Mother’s Day.
When you book the spa’s mother and daughter one-night break, mum also gets an extra 55-minute manicure or pedicure and Elemis gift as well as the usual pampering. From £275.
Cash hack
GET a free latte by visiting a Starbucks between 1pm and 2pm this week.
Each day until Thursday, different stores will host “pop-up parties” handing out lattes – normally around £2.40.
To see if your local store is involved visit starbucks.co.uk/popupparty before 2pm the day before each party.
Money test: The Furbo
DOG owners know you can’t leave Fido alone for too long – but professional dog walkers and sitters don’t come cheap.
So what about a hi-tech alternative? The Furbo is a gadget 9in high with lights, microphones and speakers.
When you launch the smartphone app, from wherever you are, it lets you see what the camera on the Furbo sees.
By touching the screen you can make it spring a treat into the room. The speaker lets you talk to the dog as well and the microphone can send you alerts if your dog barks.
You can take photos or shoot videos as well. It costs £189 from Amazon.
Here, reader David Smith, 58, from London, and his dog Macy give their verdicts.
MACY’S owner David says:
“Setting up the Furbo involved a smartphone app and connecting the Furbo wirelessly to broadband, though this was relatively painless.
“The camera on the front has night vision and reasonably good quality pictures. When you swipe the screen, the Furbo makes a bleeping noise and delivers treats. My dog found it all a bit traumatic, though she calmed down after a few days.
“For me, you can’t beat a dog walker. They are a real person and they take the dog on walks, where there are endless smells to be investigated.
“My dog walker is amazing – she’s very flexible, she always turns up and spends a full hour making my dog feel loved. It costs a lot more in the long run but I think it’s worth it.”