Wake up! If you’re aged between 18 and 39, you could be missing a great opportunity to claim up to £1,000 of free money a year from the government. You can use this to buy a home or retire wealthy, but only if you stop loafing around.
Lifetime opportunity
You can claim that £1,000 if you invest in a Lifetime ISA. You can pay in up to £4,000 a year and a 25% government-funded top-up lifts this figure to £5,000. You might think people would be rushing to snap it up, but they’re not. Take-up has disappointed and there is a danger the whole scheme could be scrapped.
Just 166,000 Lifetime ISA accounts were opened last financial year, shy of the 200,000 anticipated by MPs. Savers also paid in less than expected at £3,114 each, below the anticipated average of £3,500.
Confusion
One reason is that people don’t have much spare money knocking around. The scheme is a little complex and sits awkwardly alongside other incentives, such as Help to Buy and pensions tax relief. There is also a shortage of providers.
The Lifetime ISA is a mutant beast. The original intention was to help first-time buyers save a deposit for their first property. Then it was bent and twisted into a long-term pensions vehicle as well: if you leave the money untouched until at least age 60, you can use it for retirement savings.
Fantastic beast
To stop people from grabbing the bonus and blowing the money, the Lifetime ISA imposes tough exit penalties on those who take the money for any reason other than property or pension, sewing further doubt and confusion.
Many understandably prefer to stick to a pension, which offers generous tax relief and can be passed to family free of inheritance tax, whereas a Lifetime ISA cannot.
This malformed hybrid may not be long for this world but if you are eligible it is still a great way to invest. Once you have taken one out, you can continue to claim the annual bonus until the day before your 50th birthday. If a younger family member takes one out at 18 and pays in the maximum amount until 50, they could get a maximum £33,000 of free money, plus interest and growth. It may be the only investment they need.
Bonus features
This year the ISA allowance is worth £20,000 in total. You can invest £4,000 in a Lifetime ISA and still have £16,000 of your overall allowance left. The former should be your priority.
Let’s say you invest £4,000 a year in a FTSE 100 index tracker for 10 years, and growth averages 6% a year. At the end of that period, you will have £63,050, with dividends reinvested. If you invest the same sum through a Lifetime ISA plus top-up, your £5,000 annual investment would be worth £78,812 after 10 years. That’s £15,762 more. The longer you leave your money invested, the more you will gain.
The Lifetime ISA may be put down, but free money while it lasts is better than no free money at all. Sleep on it, but not for too long.
