It’s been a year since the launch of the lifetime Isa – and from April onwards, the 25% government bonus will be paid monthly, rather than annually. But is your bonus earning you returns?
The bonus is a major drawcard for savers, but it’s not always obvious where this bonus goes. Some account providers put the money into a no-return cash account, where it won’t accrue interest or be invested.
We’ve asked the lifetime Isa providers what they do with the government bonuses, and explain how to make sure you’re not missing out on opportunities to grow your savings.
What is the lifetime Isa bonus?
When you save into a lifetime Isa, the government will add an extra 25% to your yearly contributions. You can deposit up to £4,000 a year, so the the maximum annual bonus is £1,000.
Savers with existing accounts were paid their bonus for the last tax year after 5 April 2018. But from April onwards, the bonus will be paid out monthly.
The money saved in a lifetime Isa can only be used toward the purchase of your first home, in retirement when you reach the age of 60 or above, or if you have a terminal illness.
If you withdraw money for any other reason, you’ll have to pay a penalty of 25% on the amount withdrawn, which is likely to be more than you’ll have received in bonuses on that sum.
How do lifetime Isa account providers pay the bonus?
The majority of lifetime Isa accounts offer stocks & shares investments – currently only one provider, Skipton, offers a cash option.
But the way providers treat the bonus varies. Some will automatically re-invest your bonus, meaning it can potentially grow in value, while others will put your money into a cash account until otherwise instructed.
We asked major providers how they pay the government bonuses, and how to make sure all of your money is given the opportunity to grow.
Bonus paid into cash account
AJ Bell’s stocks and shares lifetime Isa is execution-only, which means that there are no automatic investments, unless you specify that you want them. It pays the bonus into a central account, so it is down to you to decide whether to invest it, and where.
You won’t be charged to hold the interest as cash but it also won’t grow in value. Rather than letting your money sit dormantly in this account, you can set up a regular investment service where your money is invested on the 10th of each month (or the next working day).
The Share Centre’s lifetime Isa also holds funds received in a cash section of your account. Again, the account is execution-only, so it is up to you to choose how and when to invest this money.
When the bonus has been allocated, customers should receive a communication to let them know the money is being held. It will accrue no interest, and you will have to give instruction to invest the money.
Hargreaves Lansdown pays the bonus straight into customers’ Vantage accounts, where all funds are initially deposited. If you have chosen to be a regular saver, money from the Vantage account will be invested into the same funds already chosen for monthly contributions.
If you haven’t chosen this option – perhaps investing in less frequent lump sums, for example – the bonus will be deposited as cash, and will be held until you decide to invest it. There’s no charge to hold cash, but you won’t receive any interest on it either.
Bonus automatically invested
Nutmeg, OneFamily, MoneyBox and Foresters Friendly Society will automatically invest the lifetime Isa bonus into the same fund or account the rest of your money is invested into.
In the case of Nutmeg, MoneyBox and OneFamily, you will have already chosen a fund to pay into when setting up your account, based on your attitude to risk or how long you want to buy in.
Nutmeg and MoneyBox both have three investment options to choose from – cautious, balanced or adventurous – which relate to the level of risk you are comfortable taking on. As a general rule, the larger the risk, the larger the potential gain.
OneFamily has two investment options: a global equity fund for investments over 10 years, or a global mixed investment fun for five years or more.
All Foresters Friendly Society investments are paid into its Order Insurance Fund, which is its ‘with profits’ fund.
Cash lifetime Isa
The only cash lifetime Isa from Skipton pays the government bonus into your main account on or before 4 May. All cash is held in the same place, and earns 0.75% interest.
- Find out more: What is a stocks and shares Isa?
Who is eligible for a lifetime Isa?
The lifetime Isa was introduced by the UK government in April 2017 to help people save for their first home and later life.
Anyone between the ages of 18-39 can open a lifetime Isa.
Minimum deposits required to open an account vary between providers, but you can pay in up to £4,000 a year until you reach the age of 50.
If you save enough to earn the maximum government bonus for the full term of a lifetime Isa, you could earn £32,000 in free government bonuses.
This is in addition to any money earned through interest or investment returns. All money earned is tax-free.
- Find out more: Lifetime Isas – everything you need to know about this saving incentive