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26 Nov 2019

New cash lifetime Isa launches from Paragon Bank - is it any good?

Competition is heating up, as Help to Buy Isas are set to close to new savers

Paragon Bank has launched a cash lifetime Isa account paying 1.15% AER, taking the total number of these products aimed at first-time buyers and those saving for retirement up to 14.

Lifetime Isas enable you to earn a 25% government bonus of up to £1,000 a year on your savings.

Paragon's launch comes just days before Help to Buy Isas are due to close to new savers, and it's the first new lifetime Isa account to open in just over four months. But the competition is still limited - with just 14 products in total across cash and stocks & shares options.

Here, we look at how the Paragon Bank Lifetime Isa measures up to rival offerings from Skipton, Nottingham and Newcastle Building Society, and Moneybox.

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What does the Paragon Bank cash lifetime Isa offer?

The Paragon Bank Lifetime Isa pays 1.15% AER on what you save, in addition to the government's 25% bonus, which is paid monthly.

The account can be opened with £1 and must be done online. You can then manage the account online, by post or telephone.

It accepts transfers from other lifetime Isas, and there are no additional account fees.

Up to £85,000 of your savings will be covered by the Financial Services Compensation Scheme (FSCS) in case the bank goes bust.

This is something to keep an eye on, as if you make the maximum deposit every year, you will exceed this limit in 17 years when you factor in the maximum amount you can save plus the government bonuses - and this is before interest.

How does the new lifetime Isa compare?

Paragon's new lifetime Isa account brings the total to 14: five cash lifetime Isas, and nine stocks and shares lifetime Isas.

The table below shows how the cash lifetime Isas compare:

AccountAERMinimum initial depositTransfers accepted?
Moneybox Cash Lifetime Isa1.4%£1Yes
The Nottingham Building Society Cash Lifetime Isa1.25%£10No, transfers are not permitted from any kind of Isa account
Paragon Bank Cash Lifetime Isa1.15%£1Yes, but only full lifetime Isa transfers
Newcastle Building Society Cash Lifetime Isa1.1%£1Yes, but only full lifetime Isa transfers
Skipton Building Society Cash Lifetime Isa1%£1Yes

As the table shows, Paragon Bank's Lifetime Isa account offers the third-best AER rate. There's little variation between the accounts, though, so it only falls short of the Moneybox leading rate by 0.25%.

The Paragon account also accepts transfers from other lifetime Isas. While this feature was set out in the government's initial lifetime Isa proposal, to make sure savers can switch between products, not all accounts accept transfers.

Nutmeg, OneFamily and Hargreaves Lansdown don't accept lifetime Isa transfers, while the Nottingham Building Society doesn't accept transfers from any kind of Isa.

What's the difference between a cash lifetime Isa and a stocks and shares Isa?

The main difference between the two types of lifetime Isas is how your money is invested and the element of risk it's exposed to.

With a stocks and shares Isa, the value of your investment can go up as well as down, and therefore there is a chance that you will lose money.

Stocks and shares Isas might be better suited to those saving towards their retirement, as they tend to work better for long-term savers. This is because, if the market takes a dip, you'll have more time to recover the value of your investment.

If you're saving for your first home, a cash lifetime Isa might offer more stability - particularly if you're looking to buy a home within the next five years.

Should I get a lifetime Isa?

Before opting for a lifetime Isa, you must make sure you fully understand the many caveats involved with this kind of account.

Firstly, only those aged between 18 and 39 can open one.

Secondly, you'll need to make sure that the money you save will only need to be used to buy your first home, or to spend in retirement when you're over the age of 60.

Withdrawing or transferring money for any other reason (apart from having a terminal illness) will result in a 25% withdrawal penalty. In addition to losing the government bonus, this penalty will also take 6.25% of your own money.

That being said, if you stick to the rules, lifetime Isas are a great way to earn a free £1,000 a year. In fact, if you pay in the maximum £4,000 every year while you're aged between 18 and 50 (the maximum age you can pay into the account), you'll earn £32,000 in free government bonuses alone.

We explored many of the lifetime Isa's pros and cons in our long-read article 'Is there life in the lifetime Isa?'.

If you have any doubts, cash Isas or alternative savings options could be better for you.

Help to Buy Isas will also be available to new savers until Saturday 30 November 2019; our recent story reveals the top rates and shows how these accounts compare to lifetime Isas.