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New stocks and shares lifetime Isa launches: should you get one?

Could your savings benefit from this investment?

Unity Mutual has just announced the launch of a new stocks and shares lifetime Isa, offering a guaranteed return rate of 1.25% AER.

This is the ninth stock and shares lifetime Isa to launch since the product was introduced in April 2017. But how does it compare to previous products?

Lifetime Isas, which are designed for first-time buyers and those saving for retirement, offer an additional 25% government bonus on top of what you save – up to a maximum of £1,000 in each tax year.

Here, we look at what the new lifetime Isa offers, and whether it could be a good option for you.

  • Saving for a house deposit? You can get expert advice on your mortgage options by calling Which? Mortgage Advisers on 0800 197 8461.

What does the Unity Mutual lifetime Isa offer?

Unity Mutual is the financial services brand of The Oddfellows friendly society.

Despite being a stocks and shares investment product, the lifetime Isa pays a guaranteed return of 1.25% on all money paid into the account, including the 25% government bonuses.

Once government bonuses are received each month, they are automatically invested along with your other savings.

Additional life cover

If you commit to paying in at least £1,000 per year for five years into the lifetime Isa account, £5,000 is provided for free Unity Mutual life insurance cover. A Unity Mutual spokesperson told us the deposit requirement is ‘based on intention’, so if you set up a direct debit to the lifetime Isa you will be able to get that life cover.

Investments

Unity Mutual will invest your money into a mix of funds, which could include cash, government bonds, corporate bonds, equities, property and other assets – this will change at the discretion of the company.

The account has been classified as a three out 0f seven medium-low risk, but this can vary over time. The ideal period of time for holding the account is five years.

Changing interest rates

The advertised 1.25% guaranteed interest rate is only available until April 2019, when it could increase or decrease.

Unity Mutual sets interest rates in March for the following tax year, and interest is earned on a daily basis.

Isa transfers

Unlike many other lifetime Isa providers, the Unity Mutual product does accept transfers from other lifetime Isas, Help to Buy Isas, and other types of cash or stocks & shares Isas.

Currently, you also can’t transfer lifetime Isa funds to Nutmeg, One Family or Hargreaves Lansdown.

The Nottingham does not accept transfers from any other kind of Isa, and while Newcastle Building Society currently doesn’t either, the bank says it should be possible in future.

Minimum contributions

To open the account, you’ll need to set up a direct debit for at least £25 a month, or make an initial deposit of at least £250.

What is a mutual?

Mutual organisations – also known as ‘friendly societies’ – are private companies owned by their customers, rather than shareholders. Ideally, this means that any profits made by the company will then be paid back to benefit members, or any other causes that the members have voted to give money to, eg charities or good causes.

Unity Mutual is the finance arm of The Oddfellows friendly society, which is a not-for-profit charitable organisation.


How does the new lifetime Isa compare?

There are currently three cash lifetime Isas on the market, and an additional nine stocks and shares lifetime Isas – making the product from Unity Mutual the 13th lifetime Isa to launch.

The main thing that sets stocks and shares Isas apart from their cash counterparts is the element of risk that comes with investing, for which you tend to be rewarded with a higher rate.

However, as the Unity Mutual product comes with a guaranteed return, there is no risk involved. The only thing you may find is that, if the investment has performed poorly, Unity Mutual might lower the rate over the next period to allow the funds to recoup losses.

This is unlike the other stocks and shares products, where the value of your investments could go up as well as down.

This also differs from the lifetime Isa product offered by Foresters Friendly Society, which has a caveat that a ‘market value reduction’ may apply.

This means that if you transfer or withdraw from your account in adverse conditions, the amount you receive could be reduced. Foresters Friendly Society claims this is done ‘in order to ensure fairness between policyholders leaving the fund at different times’, ensuring that those making withdrawals in future aren’t left without any money.

There are also no charges for managing the Unity Mutual account, which also sets it apart from other stocks and shares products.

On the downside, other stocks and shares options give you the the opportunity to benefit from investments doing well. If the Unity Mutual investments do better than expected, you won’t get any additional bonuses or higher rates – the rate will remain the same for the tax year.

While the 1.25% AER from Unity Mutual is higher than that on offer from any cash lifetime Isa (the next-highest rate is currently 1.1% AER from Newcastle Building Society) it is not dramatically more. It’s possible you would stand to make more from a stocks and shares investment if you keep it for the suggested five year period.

Should I get a lifetime Isa?

There are a lot of caveats to bear in mind when considering a lifetime Isa.

Firstly, there’s a strict age restriction that means you must be between 18-39 to take out this product.

You’ll also need to be sure about what you’re saving for. If there’s a chance you won’t want to use the money towards your first home or in retirement, you could face a hefty withdrawal penalty if you want to access your money for any other reason.

The penalty means you’ll not only lose out on the government bonus on the sum of money you’re withdrawing, but also any growth the money has made.

But, if you stick to the rules, a lifetime Isa can be a great way of boosting your savings.

Those who take out the product at 18, and who pay in the maximum £4,000 each year until they reach the maximum age of 50, could earn £32,000 in government bonuses alone – £1,000 each year.

If you add that to what you’ll have saved, you’ll have a pot of £160,000 before any kind of interest or investment growth.

Before you make a decision, it’s worth checking whether alternative cash Isas or alternative savings options could suit your needs more.

What is a lifetime Isa?

A lifetime Isa is a government-backed tax-free savings account, which can only be opened by those aged between 18 and 39.

You can pay in up to £4,000 in each tax year. For on every £4 you pay in, the government will give you a bonus of £1. The 25% bonus is paid monthly, and the most you can receive in each tax year is £1,000.

The contributions you make into a lifetime Isa count towards your £20,000 Isa allowance. This is the overall amount you can pay into Isas in each tax year, and it can be split between different types of Isas.

So, if you were to pay the maximum £4,000 deposit into a lifetime Isa, you’d then have £16,000 left to pay into other cash, stocks and shares or innovative Isas you might hold.

You can pay into the account until you turn 50, and withdrawals can only be made either to buy your first home (for first-time buyers only), or after you’ve turned 60.

The only exception is if you’re diagnosed with a terminal illness. Making withdrawals for any other reason will result in a withdrawal penalty.

If you’re using your savings towards a property, you must intend to use it as your home, it must be in the UK, and the maximum value is £450,000.

Saving to buy your first home?

The process of saving up for your first home can seem daunting, and lifetime Isas can help boost your bank balance.

Everything you save, including bonuses, can be used as part of your deposit once you’ve exchanged contracts, and can go towards other costs of buying a home.

Even if you haven’t saved enough for a deposit yet, it’s worth thinking about your mortgage options early so you know how much you need to save.

For expert impartial advice on buying your first home, you can call Which? Mortgage Advisers on 0800 197 8461 or fill out the form below to request a callback.

Please note that the information is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of the savings account provider before committing to any financial products.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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