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Is there life in the lifetime Isa?

Which? investigates whether the savings product has a future

Is there life in the lifetime Isa?

Changes are coming this year for the UK’s first-time buyers. The government’s Help to Buy Isa will close to new applicants in England and Wales on 30 November. So, for those who need a boost to buy their first home, the lifetime Isa will become the only government-backed option.

But is it up to the job?

It doesn’t look like it. Since its launch in April 2017, response to the lifetime Isa has been lacklustre – few providers have signed up to offer it (only 13, in fact).

It’s hard to pinpoint the reason for this, but many suggest harsh withdrawal penalties could be the major turn-off.

The lifetime Isa is also applicable to a smaller demographic than the Help to Buy Isa; you must be aged between 18 and 39 to open one – freezing out older and younger savers.

The explanation for this is that the product is being aimed specifically at millennials, who fall roughly into this age group.

It comes at a time when reports are finding a third of millennials never expect to own a home, and see themselves renting into retirement – not that they know how they’ll pay that rent, with the shaky future of the state pension and stagnant wage growth throughout their working years resulting in measly savings pots.

It’s into this bleak future that then-Chancellor George Osborne threw the lifetime Isa: a solution ‘to support savers at all stages of their life, including by increasing choice for consumers and helping young people save flexibly for the long term’.

But does it deliver?

Not on choice, that’s for sure. Just 13 accounts have opened in nearly two years.

Three offer cash Isas with low interest rates; one is just for those associated with the Met Police; one can only be accessed by financial advisers.

The remaining eight offer stocks & shares Isas, where your account is at risk of losing value if markets don’t perform well.

Very few are from big banks that you’d have heard of.

For Michelle Amos, a 26-year-old press officer in London, buying a home has become her number one goal and she has made saving a priority.

But she has a battle on her hands.

Two decades ago, the average flat in London could be had for less than £100,000. Today, the same property averages more than £484,000 – above the property price limit a lifetime Isa can be used on – meaning Michelle will need to save at least £25,000 for a deposit on even a 95% mortgage, let alone the cost of solicitor’s fees, surveys and stamp duty.

What’s more, in order to get a mortgage to secure this house, Michelle would need to be earning more than £114,000 a year, based on the fact that most mortgage lenders will commonly offer a mortgage sum of up to four times a borrower’s annual salary.

Such complex economic and generational factors are at odds with the all-too-common media headlines blaming millennials for their own demise.

Apparently, millennials are stuck renting or living with their parents because they spend all of their money on avocados; they go on too many holidays and gap years; they throw their money away on cleaners because they’re too precious to take to a scrubbing brush.

But now we have the lifetime Isa; an account where – if we can force ourselves to squirrel away all that avocado money we’ve been squandering – the government will give us a bonus of 25%, and we’ll finally be able to buy a house and/or have money in retirement.

Can it possibly fulfil these aims?

In this article, we explore:

How popular has the lifetime Isa been?

In Osborne’s 2016 Budget, it was estimated more than 200,000 savers in the UK would open a lifetime Isa in its first year, with each person saving an average of £3,500 a year.

These expectations weren’t met. HMRC recently released figures that showed 166,000 lifetime Isas were set up in its first year – below the projected 200,000.

How do the numbers look now that the product is nearly two years old?

There are currently 13 lifetime Isa providers; Skipton Building Society, Nottingham Building Society and Newcastle Building Society offer cash Isas, while the others offer stocks & shares options, requiring you to take on a higher risk investment.

The most popular is Skipton Building Society, with more than 120,000 customers.

Skipton says 73% of its customers are saving for their first home, have an average age of 27 and an average balance of £2,759 – saving significantly less than the government’s predictions. More than 66% of customers live in south-east England or Greater London.

We asked other lifetime Isa providers who is saving with the product:

  • Hargreaves Lansdown says more than 50,000 people have its lifetime Isa
  • AJ Bell has over 10,000, 46% of whom are between the ages of 30-39
  • Nutmeg has more than 12,500 customers with an average age of 33
  • MoneyBox reported it has more than 10,000 lifetime Isa savers.

The Share Centre, Foresters Friendly Society and OneFamily did not share their figures; the Nottingham Building Society, Newcastle Building Society and Union Mutual accounts are so new there aren’t figures out yet.

MetFriendly and Transact have been left out of this analysis as they’re not available to the majority of savers.

25% bonus… if you play by the rules

The promise of the lifetime Isa is this: whatever you save, the government will top it up by 25%. Sounds great, doesn’t it?

But it comes with catch, after catch, after catch.

The bonus is limited. You can pay in a maximum of £4,000 per tax year, meaning the bonus is capped at £1,000 per year. But, if you open the account at 18, and hold it until you’re 50, you could earn up to £32,000 in bonuses alone.

Deposits into a lifetime Isa will come out of your Isa allowance – the collective amount you’re allowed to pay into your Isas in one tax year. In 2018-19 and 2019-20, this is £20,000.

Only those aged between 18 and 39 can open a new account, so it’s no use for older savers.

Savers have two choices on what to do with the money: put it towards the costs of buying their first home, or funding their retirement – but for the latter the money can only be accessed after the age of 60.

If you withdraw money before you’re 60 for any reason other than buying your first property (or a terminal illness), you’ll be faced with a steep withdrawal penalty, where you’ll lose 25% on what you withdraw.

But this penalty doesn’t just take back the 25% government bonus.

You’ll also lose a 6.25% charge on your own money. Effectively, you’ll be paying part of your savings to the government, just to access your money.

These are stringent requirements; somewhat surprising given Osborne said the account was designed to help young people ‘save flexibly’.

Find out more: lifetime Isas – our guide has more detail on the basics of this product.

Penalties under fire

The withdrawal terms have garnered significant criticism, with several calls for them to be fundamentally altered.

A Treasury Committee report saw MPs call for the lifetime Isa to be scrapped altogether. They said the product has been shunned, and that the only people who had one were the children of rich parents.

Baroness Altmann called the savings product ‘another mis-selling scandal waiting to happen’.

The report also admonished the fact that the full extent of the withdrawal penalty had not been explained on the gov.uk website – and it still hasn’t been, even after a formal letter of complaint. The public could therefore still be unaware of the full extent of the withdrawal penalty.

Even the lifetime Isa providers aren’t happy with the terms. An AJ Bell spokesperson has said the exit penalty and age restrictions are major drawbacks.

Elsewhere, four other think-tanks and influential bodies have also formally objected to the withdrawal penalty. But still no change.

Tricky terms that catch you out

While the lifetime Isa providers stick to the government terms we’ve outlined, they each have their own conditions that could prove tricky.

Having analysed the available T&Cs for each lifetime Isa, apart from MetFriendly and Transact, there are a few quirks that could cost savers dearly.

Use our tool to explore and compare each account’s terms.

No-interest on bonuses

Lifetime Isa providers pay the monthly government bonus in slightly different ways – and some could mean missing out on the chance to grow this money.

Skipton, Nutmeg, MoneyBox, OneFamily, Nottingham Building Society, Newcastle Building Society, Unity Mutual and Foresters Friendly Society invest the bonus into the same fund or account where the rest of your money is saved.

But Hargreaves Lansdown, AJ Bell, Transact and The Share Centre, however, have bonus funds paid into the accounts as cash. Without further instruction, this money will neither be invested nor accrue any interest, and the onus is on you to make sure that doesn’t happen.

Find out more: lifetime Isa bonus paid monthly: could you be missing out on returns?

Restricted transfers

Under the general Isa rules, you should be permitted to transfer funds between lifetime Isas. But a surprising number of providers restrict transfers.

Nutmeg and OneFamily haven’t ever offered the service, and Hargreaves Lansdown recently stopped receiving existing lifetime Isas.

This decision has been put down to the added complexity caused by the monthly bonus payment system, which began in April 2017. The provider said there’s no clear way to see whether the bonus has already been paid at the time of transfer, risking over or under-payment.

In addition, the cash lifetime Isa from Nottingham Building Society, which launched in August 2018, doesn’t accept transfers from any kind of Isa – including Help to Buy Isas, lifetime Isas, and any other cash or stocks & shares Isa.

It’s also been reported that AJ Bell is stopping savers over the age of 40 from transferring their lifetime Isa elsewhere.

Loss of funds

With all stocks & shares investments, there is an implicit risk that your money may grow or shrink depending on the performance of the investments. But funds invested with Forester Friendly Society have another caveat.

As this is a mutual society, the money you get when you withdraw your savings may depend on whether a ‘fair share’ would be left for remaining members.

This means a deduction, known as a a Market Value Reduction (MVR), may apply when you make withdrawals, which means you may get back less than you paid in.

An MVR has not been applied to the Foresters Friendly Stocks & Shares Isa to date.

Complex fee structures

Each stocks & shares lifetime Isa charges different fees for investing and running the account.

Some providers display the fees prominently; others are buried in the terms and conditions. Some have a flat-rate fee that covers all kinds of investments while others vary.

Failure to pay account fees can also incur penalties. MoneyBox’s platform provider will sell your investments until the amount due has been met, starting with the largest holding; Hargreaves Lansdown sells investments with a charge of £1.50 for each time this has to be done; AJ Bell charges £29.95 plus VAT per holding sold to cover charges.

Lifeline for first-time buyers

Like many millennials, the dream of home ownership is what motivates Michelle Amos to save.

Yet while the lifetime Isa has been billed as the answer to first-time buyers’ woes, Michelle doubts she’ll be able to save enough with her Nutmeg lifetime Isa in time to achieve her goals.

‘Because you can only save £4,000 a year, I’ll have to save elsewhere if I want to buy more quickly – so my lifetime Isa savings will only be a portion of that,’ explains Michelle.

There are several rules you have to adhere to in order to use your funds towards your first property.

To qualify as a first-time buyer, you must never have owned a residential property or even a share of one. So, if you inherit all or part of a property, you won’t be able to use your lifetime Isa funds.

The property must be in the UK, and have a maximum value of £450,000.

You must buy the home with a mortgage, and use a solicitor or conveyancer to act for you in the purchase. The lifetime Isa funds will be paid directly to them by the provider.

The funds, including the bonus, can be put towards an exchange deposit, but the property purchase must be completed within 90 days of your conveyancer receiving the money.

Any funds ‘left over’ from the purchase of the property must remain in the account, and you won’t be able to access that cash until you turn 60.

You must have held the account for at least 12 months before you can buy your first home.

If you’re buying with another first-time buyer with a lifetime Isa, both people’s funds and bonuses can be used together, but the £450,000 property value limit will not increase.

The many, many rules may be considered too restrictive, but Michelle thinks the Isa’s strict terms will help her save.

‘I like that the savings could only be put towards your first house,’ she says, ‘rather than me being able to take out the money to buy something extravagant.

‘I also liked that you can put in however much you want each month up to £4,000 a year. So, if there’s a few months where I can’t save a lot, I can always try to put in £1,000 at the end of the year. You can only put in £200 a month with the Help to Buy Isa.’

Taking on investment risk

When you invest in a stocks & shares account, growth is compounded over time – usually over at least five to 10 years. This means that, hopefully, any dips in the market are smoothed out.

But there is a question of how well a stocks & shares lifetime Isa can serve first-time buyers as, like Michelle, many are eager to get on the property ladder to beat rising property prices.

Michelle says: ‘I’ve been looking at flats online, and if I wait until I have, say, £20,000 saved in my account, prices might have gone up, and it still might not be enough. So I want to buy within the next three to four years.’

Cashing out ‘early’ to buy a home – ie in less than 10 years – may mean you end up making a loss.

This is something Michelle has had to consider.

‘Because there’s not much saved in the Isa at the moment, it didn’t worry me too much when the value dropped,’ she says. ‘But because I’ve chosen quite a high risk investment, when I have more money in there I’ll reduce the risk.

‘If I had £15,000 saved, I wouldn’t want the risk of losing a few hundred pounds, because that could make a big difference.’

Lifetime Isa versus Help to Buy Isa

For first-time buyers saving for their first home, the lifetime Isa is in direct competition with the Help to Buy Isa, which was launched in 2013.

While only available as cash Isas, the Help to Buy product has a similar 25% government bonus on top of your savings, but this is capped at £3,000. It would take a minimum of three years to earn this bonus with a lifetime Isa, but at least five years with a Help to Buy Isa.

In the first month savers can deposit up to £1,200, and a maximum of £200 a month after that.

You’ll get the bonus when the property purchase completes, and it’s paid to your solicitor.

The Help to Buy Isa is for properties up to £250,000 in the UK, with the exception of London, where buyers can have a maximum value of £450,000.

Find out more: Help to Buy Isas explained

Despite the restrictions, the Help to Buy Isa has so far proved to be much more popular than the lifetime Isa.

There are currently 27 providers listed on the government’s Help to Buy website, and more than 1.2m Help to Buy Isas have been opened since the scheme launched – both figures dwarf the lifetime Isa uptake.

Partly, this may be explained by a first-mover advantage. People with dreams of home buying leapt on the Help to Buy isa when it was the only product of its kind on the market.

It’s likely that the simpler nature of the Help to Buy Isa also appealed; there are only cash options, which are ‘safer’ for those who aren’t familiar with investments.

Saving a retirement nest egg

No one wants to be forced to work into their eighties because they can’t afford to retire.

Mattia Barban, a 32-year-old assistant restaurant manager from Brighton, opened his lifetime Isa account with OneFamily to give him reassurance that he’ll be able to live comfortably when he’s no longer working.

‘I worry about actually being able to retire one day, with the state pension age constantly rising,’ he says. ‘I chose a stocks and shares lifetime Isa over cash, because I want my money to be invested, and hopefully in the long-term it will give me an even better return.’

Mattia has had his lifetime Isa since February 2018. ‘I’m Italian, and my parents introduced me to a similar investment product when I was 18, back in Italy,’ he explains. ‘Once I became financially stable here, I wanted to make sure I kept saving.

‘I like that on top of the automatic monthly payment I’ve set up, if I have any spare cash I can just put it in.’

This kind of flexibility – as well as being able to choose how your funds are invested – is an advantage over more rigid pension plans.

The product could be particularly useful for self-employed people who don’t receive a company pension. People with low incomes, or who otherwise don’t qualify for pension auto-enrolment, may also benefit.

Lifetime Isas versus a company pension

While the 25% government bonus sounds impressive, it doesn’t match the pension perks you can receive from an employer.

For one thing, as company pensions now operate under auto-enrolment rules, as of this year your employer will contribute at least 4% to your pension. These contributions aren’t capped to £1,000 a year like the lifetime Isa bonuses.

Another plus is that money paid into a company pension is taken before tax. Making a salary sacrifice in this way means you’ll paying less tax on the rest of your income.

You’re also allowed to make contributions to your pension past the age of 50, which is not allowed with a lifetime Isa.

You have the opportunity to save so much more into a company pension. The lifetime limit for a pension is currently £1.03m, whereas the maximum you can possibly deposit in a lifetime Isa with the bonus is £160,000 – and that’s only if you pay the maximum deposit every year between the ages of 18 and 50.

Once that money’s saved, you can also access it much more flexibly. Money saved in a company pension can be withdrawn when you turn 55, but you’ll have to wait until you’re 60 with a lifetime Isa.

Another factor is that in times of hardship – say you lose your job, or need long-term sick leave – your pension is not classed as accessible savings and will not affect your rights to means-tested benefits.

Lifetime Isa funds, however, are classified as personal savings. This could mean you’ll get fewer benefits, or none at all.

If that were to happen and you desperately needed money, you’d have to withdraw cash from your lifetime Isa and pay the withdrawal penalty, reducing your much-needed funds. It’s a terrible catch-22 scenario.

It will be at least another 18 years before we can see how the product works for those in retirement. Those who opened one aged 39 when the product launched in 2017 will be the first.

No guarantees for retirement

According to the data from lifetime Isa providers, 30-something savers are the ones saving for retirement.

But what will the financial landscape look like when they turn 60?

Taking the example of a saver who is 30 today, the earliest they’ll be able to access their savings is in 2049.

In the past 30 years, the UK economy – and particularly pension funds – has undergone huge changes.

Such alterations are likely to continue as an increasingly ageing population adds pressure to pension funds.

According to the Office of National Statistics (ONS), the UK population grew by 7.8 million between 1980 and 2013.

By 2037, the UK population is projected to grow by another 9.2 million to reach 73.3 million, when life expectancy expected to reach 97 for females and 94 for males.

If the lifetime Isa takes off, will a government that is facing such a strain on its state pension realistically be able to pay out up to £32,000 in bonuses to every saver?

The past 30 years have also seen huge changes to the ways the government handles benefits, pensions and incentives. So, there is a chance that the iteration of the lifetime Isa in 30 years’ time could be very different to the product savers signed up for.

And, under the current withdrawal penalty system, there’ll be nothing customers can do if they want to get out early without losing some of their money.

With all of this in mind, relying on a lifetime Isa to fund your retirement could be risky.

Little love from banks

Which? asked all Help to Buy Isa providers whether they are planning to offer the lifetime Isa in future. Of the 15 that replied, none said they had any immediate plans to do so.

Since then, Nottingham Building Society and Newcastle Building Society have, in fact, launched lifetime Isas – but no others have followed.

When asked of their plans to offer a lifetime Isa, a Nationwide spokesperson told us: ‘As a major savings provider, we need to be assured that any products we offer are simple to understand and will benefit a sizable proportion of our customers.

‘We believe the existing Help to Buy scheme is the most effective option for first-time buyers due to its benefits, simplicity and proven success. It should be extended and enhanced.’

The building society has previously called for the extension of the Help to Buy Isa, as well as increases to the maximum monthly deposit and the £250,000 maximum property value limit.

So far, the Isa scheme has only been extended in Scotland, where it’s due to close in 2021.

What’s the future of the lifetime Isa?

While more traditional banks have been slow to adopt the lifetime Isa, being embraced by modern challenger banks could be a good thing.

Slick apps that let you manage your money on-the-go are likely to appeal to its millennial market, as well as integration with cool technologies, such as MoneyBox’s round-up feature.

This feature rounds up purchases to the nearest pound, and the extra change is added to your account, so you’re saving without even noticing.

As for the growing number of calls to make substantial changes to the lifetime Isa, Chancellor Philip Hammond failed to mention anything in the 2018 Autumn Budget, so they’re unlikely to happen any time soon.

It remains to be seen whether Michelle’s lifetime Isa will be the ticket to finally getting the first home of her dreams. Hopefully it is – perhaps even permitting her to eat a few avocados while she saves.

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