Ask Gareth Shaw: Is a lifetime Isa the right way to save for my son?

Question: I’m seriously concerned that my son, who is 18, will never be able to get on to the property ladder without financial support. I don’t expect him to buy a property until he’s nearing his 30s, so what is the best way to save for him? How much should I be saving? And should I put money into my Isa and transfer it to him, or should I open up a lifetime Isa for him?

Getting on to the first rung of the property ladder is an expensive business

Answer: According to the most recent English Housing Survey, the average age of a first-time buyer in 2019-20 was 32 years old, or 34 years old in London. Just one in five people bought their first home on their own – most people buy as a couple. Not only does this reflect the changing priorities when you’re in a relationship, it is often the only way you are able to afford a mortgage. Lenders will typically offer a loan four to five times your salary – with the average house price at £250,000 currently, someone with a 10 per cent deposit would need to earn at least £45,000 a year to have a chance of getting a mortgage. With London prices currently averaging £496,000, you’d need to be earning at least £90,000 a year.

Your concerns are shared by millions of parents in the country. According to insurer Legal & General, 19 per cent of home purchases were funded partly or wholly by family and friends. So, it is helpful that, with 12 years until your son reaches the ‘average buyer age’, you’re thinking about the journey to a deposit.

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With such a long time horizon and not knowing how big a deposit your son will need – if I had a crystal ball predicting the future of house prices, I almost certainly wouldn’t be writing this column – I cannot say what the optimum amount is to put away. But I can talk you through the features of a lifetime Isa, so that you can have an informed discussion about its suitability and which one he should choose.

I put the emphasis on your son making the choice, as you cannot open one of these accounts on his behalf. Any money that is deposited into a lifetime Isa will be legally his, and he is free to do with it what he wishes (within the rules of the Isa). You need to make sure you are comfortable with saving in this way.

Lifetime Isas are tax-free savings accounts that can be used towards purchasing your first property or for your retirement. They are only for adults aged between 18 and 39.

For every £4 you save into a lifetime Isa, the government will add £1 up to a maximum of £1,000 every tax year until you turn 50 years old. You can save up to £4,000 a year, on which the 25 per cent government bonus is added, although you can actually add more but it won’t benefit from the government contribution. So, in theory, if you paid in the maximum £4,000 a year, your son could get £12,000 just in bonuses from the government by the time he is ready to buy. Bonuses are paid monthly, a real advantage as the money in the Isa benefits from compound interest. Parents and grandparents can also pay into a lifetime Isa opened by their child or grandchild.

The rules on these Isas are strict. When you’re under the age of 60, the money cannot be spent on anything other than buying your first home, worth up to £450,000. Withdrawals are tax-free. But if money is withdrawn under the age of 60 for anything other than a property purchase, you’ll be hit with a 25 per cent penalty on the amount withdrawn. This does not mean you'll only lose out on the government bonus; the penalty means you'll also lose 6.25 per cent of your own money, in addition to losing the bonus.

There are currently 16 lifetime Isa providers, offering either cash or stocks and shares options. Cash rates are, at the moment, poor – no cash lifetime Isa pays more than 0.85 per cent pa. With a long time horizon, you may want to consider a stocks and share option, though this will depend on your understanding of investing and comfort selecting and managing the investments.

You can find out more about lifetime isas at which.co.uk/lifetimeisa.

Gareth Shaw is Head of Money at Which?

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