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3 Jul 2019

New market-leading cash lifetime Isa launches today - should you open one?

Lifetime Isas could help you buy your first home or have a comfier retirement

Moneybox, the app-only investment platform, has joined forces with OakNorth Bank to launch a cash lifetime Isa paying 1.4% AER - the best-ever rate for this kind of account.

Aimed at first-time buyers and those saving for retirement, lifetime Isas enable you to earn a 25% government bonus on your savings up to a seemingly impressive maximum of £32,000.

But competition in this market is limited, with Moneybox's new cash lifetime Isa only the fourth of its kind to hit the market since lifetime Isas were launched in April 2017.

Below, Which? looks at how the Moneybox Isa measures up to rival offerings from Skipton, Nottingham and Newcastle Building Societies, and explains why lifetime Isas might not be as good as they seem.

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What does the Moneybox cash lifetime Isa offer?

The new Moneybox cash lifetime Isa pays 1.4% 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 is available through the Moneybox iPhone and Android apps.

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

You money is held with OakNorth Bank, a fin-tech savings company that's covered by the Financial Services Compensation Scheme (FSCS). This means savings of up to £85,000 are protected if the bank goes bust.

How does the new lifetime Isa compare?

There are 12 other lifetime Isas available at the moment; three of them are cash Isas and the rest (including one from Moneybox) are stocks and shares Isas.

Moneybox is the first provider to offer more than one type of lifetime Isa. The company says the cash account is primarily aimed at those saving for their first home, although you can use it to save for retirement if you wish.

Here's how the cash lifetime Isas currently on the market compare:

AccountAERMinimum initial depositTransfers accepted?
Moneybox cash lifetime Isa1.4%£1Yes.
Newcastle Building Society cash lifetime Isa1.1%£1Yes - but only full lifetime Isa transfers.
Skipton Building Society cash lifetime Isa1.0%£1Yes.
The Nottingham Building Society cash lifetime Isa1.0%£10No - transfers are not permitted from any kind of Isa account.

The other Isas can be opened online and all are available nationwide.

The Nottingham account has an additional incentive: those who sign up can receive free mortgage advice from Nottingham Mortgage Services which would usually cost up to £249.

Bear in mind, though, that while this is a whole-of-market service (meaning they will look at every deal on the market), it's not independent. Some mortgage brokers offer independent, whole-of-market mortgage advice for free, so you may want to consider using one of them instead.

While individuals should be able to transfer their lifetime Isas - as it's a feature set out in the government's description of the product - many providers don't offer this.

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

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

The main thing separating cash lifetime Isas from their stocks and shares counterparts is the element of risk involved with your investment.

With a stocks and shares Isa, the value of your investment can go up as well as down, and there is a chance you could lose money - but you're also often rewarded with higher (albeit fluctuating) rates.

Stocks and shares Isas might be better suited to those saving towards their retirement, as they tend to work better for longer-term savers. This is because, if the markets take a dip, you have more time for the value of your investment to go back up.

If you're saving towards your first home, a cash Isa might offer more stability.

Should I get a lifetime Isa?

Before opting for a lifetime Isa, you should fully consider the many caveats involved.

Firstly, only those between the ages of 18-39 can open one - so if this doesn't apply to you, you'll have to look elsewhere.

You also need to decide what you're saving for because, unless you're aged 60 or above, withdrawing money for any reason other than buying your first home will result in a 25% withdrawal penalty. This means not only losing the bonus, but also 6.25% of your own money.

However, 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 between the ages of 18 and 50, you'll earn £32,000 in free government bonuses alone.

We've explored all of the pros and cons of lifetime Isas, along with comparing every provider's terms and conditions, in our long-read article 'Is there life in the lifetime Isa?'.

If you have doubts, it could be that cash Isas and alternative savings options - including Help to Buy Isas (see below) - could better suit your needs.

Help to Buy Isa vs lifetime Isa

For those looking to buy their first home, there's also the option of a Help to Buy Isa.

These accounts launched in December 2015, and - according to the latest HMRC data - between then and December 2018 supported 218,371 property completions, apparently helping first-time buyers purchase properties three years earlier than those who hadn't used the scheme.

Much like the lifetime Isa, the Help to Buy Isa entitles you to a 25% government bonus on your savings, but there are a few key differences.

  • Help to Buy Isas are only for first-time buyers, but there is no age limit on when you can open one.
  • The bonus is paid to your solicitor on completion of the property purchase - so you can't use it towards your exchange deposit.
  • The maximum government bonus you can receive is £3,000, paid if you save £12,000.
  • Deposits are restricted to £1,200 in the first month, and £200 a month thereafter.
  • The minimum government bonus is £400 - so you'll have to save at least £1,600 in the account. This can be done in as little as three months if you use the maximum deposit.
  • The total value of the property can be up to £250,000 across the UK, or £450,000 in London.
  • Help to Buy Isas are closing to new savers from 30 November this year (though you don't have to use your savings to buy a property until 1 December 2030) - so if you want one, you'll need to act fast.

Find out more:Help to Buy Isas explained