Martin Lewis has given parents a £4,000 warning and explained they could be missing out on a ‘free’ £1,000 if they don’t take action now. Speaking on his BBC Podcast, the personal finance expert was asked a quiestion by a viewer of if they should take out a Lifetime ISA for their daughter.
And Mr Lewis said that all parents could be missing out on a huge boost – and all they need to do to make sure they can get it is to open an account with just £1. Host Adrian Chiles said: “We’ve got one more question from Sarah. ‘I have an 18-year-old daughter should she get a help to buy ISA now?”
Mr Lewis said: “It’s now called a Lifetime ISA and it is a slightly different product. Very simply if your daughter plans to buy a first time home and is pretty sure that she’s going to do it and it’s going to be a home that costs under £450,000 then putting money and saving money into a Lifetime ISA is really powerful because you can put up to £4,000 a year and the state will add 25 per cent on top.”
Government information says that the Lifetime ISA to buy a first home or save for later life. The person must be 18 or over but under 40 to open a Lifetime ISA.
The Treasury says: “You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.”
Mr Lewis explained: “In other words if you max it out the state will give you £1,000 on top of the £4,000 every tax year until you buy.
“You need to have it open a year before you can buy a house. The key problem if you withdraw money from it for any other reason than buying a qualifying first time house, and qualifying means a house under £450,000, you’re charged an effective penalty of 6.25 per cent. So the state will take some of your money if you withdraw it. Alternatively you could leave it there until you’re aged 60 and just take the money out then and you won’t pay a penalty.
“Lifetime ISAs are only for those aged 18-39. Go and do some reading on this, but in simple terms, if she’s definitely going to buy a house in the next 5-10 years and you’re in an area where it’s very unlikely those prices would be above £450,000, I would absolutely be putting money in there; if you’re not, I wouldn’t be.”
Even if the parent doesn’t think that a house purchase is imminent Mr Lewis said it was worth taking action now: “But one thing I would do, even if you think you’re not going to do it, and I would advise every parent of an 18, 19, 20, 21 year old put £1 in a Lifetime ISA. Here’s the reason why. To get the bonus you have to have had the account open for a year.
“So let’s just suppose you put £1 in now and you don’t think you’re going to buy a house. In a year’s time something’s changed and you think you’re going to buy a house. You could then put £4,000 in and then pretty quickly within a week or two you would get £1,000 bonus and you could use it because you’ve had it opened for over a year.
“So everybody should have one opened. What’s the risk of doing this? Well the top paying Lifetime ISA is 4.7 per cent but the risk is you’d lost 6.25 per cent. I personally think the risk of 6 and a quarter pence, which is all you’re risking if you put £1 in, is worth it to have the facility there.”
Withdrawing money from your Lifetime ISA
You can withdraw money from your ISA if you’re:
- buying your first home
- aged 60 or over
- terminally ill, with less than 12 months to live
You’ll pay a withdrawal charge of 25% if you withdraw cash or assets for any other reason (also known as making an unauthorised withdrawal). This recovers the government bonus you received on your original savings.
For more information on Lifetime ISAs click here.
