Put money in a Lifetime ISA (LISA) and the state chucks an extra 25 per cent on top, up to £1,000 every year.
This makes it the powerhouse financial move. To open a LISA, which is a tax-free savings account, you need to be aged at least 18 and you can get one up until the day before your 40th birthday.
It’s worth doing for those already thinking about getting on the property ladder and for those for whom it’s still a distant dream (and yes, parents, if you’ve money to give your 18 year-old, this is where to suggest they put it).
Here are my key need-to-knows.
It’s only for someone who’s never owned or part-owned a home
You can use it to buy any residential property (not buy-to-let) costing up to £450,000.
You get a 25 per cent bonus on everything, up to £4,000 per tax year, you put in until you’re aged 50.
So, if you save £1,000, you'll have £1,250, and if you save the full £4,000, you'll have £5,000.Each person has their own LISA, so couples can have one each.
Two first-time buyers, buying a property together costing £450,000 or less, can both open one and save in it, doubling the bonus.A first-time buyer, buying with someone who’s already owned, can still get the bonus. Again, this is because it’s an individual product.
You need to have your LISA open for at least a year to use it to buy a house
Everyone should open up a LISA with £1 plus now. There’s a built-in year long wait with LISAs. So even if you’re not ready to start saving, open it with £1 to get the clock started, then when you are ready, there’s no wait.
If not, withdraw the £1 and you’ll get 94p back – no biggie.
LISAs can be used for your home exchange and mortgage deposits
When you’re ready to buy, your house purchase solicitor will need to sort out the money for you.
It can help with both the deposit you need to give the seller, and to reduce the mortgage needed.
LISAs can also be used for retirement savings. The money and bonus can also be taken out once you hit age 60.
Though for most people, especially those who are employed, this isn’t quite as efficient as putting money in a pension.
Withdraw cash for anything else, and there’s a penalty
You can take your money out whenever you want, but if it’s not for the property – or at retirement – there’ll be a 25 per cent penalty (remember you’ve already been given a 25 per cent bonus).
The maths works out that for every £100 you put in, you get £93.75 back, so only put in money you know you’ll use for buying a qualifying home or for retirement.
You can have a LISA alongside other ISAs
The overall ISA limit is £20,000 in the 2021/22 tax year. You’re allowed to split this between a LISA (up to the max £4,000) and put the remainder in a cash ISA, stocks and shares ISA and/or an innovative finance ISA in the same tax year.
The number of providers offering LISAs is limited
There are two flavours of LISA: cash LISAs, which are savings accounts, and stocks and shares LISAs for those who want to invest.
Sadly, supply of LISAs is limited as providers are nervous that if people put money in them for retirement when it’s not right for them, they could face mis-selling claims.
This is a LISA design fault that I and others warned about from the early days, but sadly it’s never been dealt with. Yet that shouldn’t put first-time buyers off.
The top LISA providers and rates can change at any time, so to find the current top payers go to the constantly updated guide at www.moneysavingexpert.com/LISAs.
You’ll also find information there on the best stocks and shares LISA options – though those tend to be best for those planning on not using the money for at least five years.Should I shift my Help to Buy ISA to a LISA?
LISAs launched in 2017, as a replacement for the similar Help to Buy ISA. You can’t open a Help to Buy ISA anymore, but the question those who have one always ask me is: should I shift it to a LISA?
Both pay a 25 per cent bonus, but there are some key differences. The big advantage LISAs have is that they let you put more money in, so you can get a bigger bonus. Meanwhile, Help to Buy ISAs start quicker, and you can take the cash out for any reason without penalty.
My full explanation of which is best is at www.moneysavingexpert.com/Help2BuyOrLISA, but in a nutshell…If you'll definitely buy a home for less than the LISA maximum of £450,000, are aged 18 to 39, and you won’t do it within a year of opening, and can max out the savings, it may be worth switching to a LISA as you will get a bigger bonus.Yet if you're buying quickly, you're 40 or over, or you're not 100 per cent sure you'll buy at all, then it's safer to stick with your H2B ISA.