It’s not often that you get the chance to pick up £1,000, for free. However, if you’re aged between 18 and 39, and act quickly, that’s exactly what you can do. How is this possible? Through the lifetime ISA, which was launched last year. Here’s a look at how it works.
Free money
The lifetime ISA is a tax-free account open to 18-39 year-olds. The account allows you to contribute up to £4,000 per year, up to age 50, as part of your overall £20,000 ISA allowance. You can hold cash or stocks/funds in your lifetime ISA, or have a combination of both.
For every £4,000 you contribute, the government will add a 25% bonus to your savings. In other words, if you pay in £4,000, the government will hand you £1,000 for free. An instant 25% return on your capital should not be ignored.
Investors should note that not all financial services providers offer this ISA right now, however, it is currently available through Hargreaves Lansdown, Nutmeg and AJ Bell.
To pick up your free £1,000 for this year, you’ll have to act quickly, as the deadline is April 5. If you fund your account in time, you can expect to receive the bonus in April.
Sounds like a good deal, right? So what’s the catch?
The catch
They say there’s “no such thing as a free lunch,” and that term is highly relevant here. There are certain conditions that are attached to the lifetime ISA.
It has been designed to help investors either save for their first property or boost their retirement savings. So the catch is that the funds must be kept in the account until either you buy your first home (note the conditions here), or turn 60. If you withdraw your funds before this, you’ll be stung with a 25% charge, meaning you could potentially get back less than you put in.
Is it worth it?
Given the harsh withdrawal penalty, it’s worth considering if the lifetime ISA is suited to your situation and requirements, before opening an account. It will suit some investors, more than others.
For example, if you have a company-sponsored pension, and your employer matches your contributions, you may be better off saving for retirement through that pension. In contrast, if you’re self-employed and receive no company pension, the lifetime ISA could be an excellent savings vehicle.
In general though, from a retirement-savings perspective, the lifetime ISA does offer considerable appeal. Given that an 18 year-old contributing £4,000 per year up to age 50 could potentially get their hands on £33,000 from the government over time, there’s a lot of free money on offer. That kind of savings boost could really turbo-charge your retirement pot over the long term.
Personally, I plan to open a lifetime ISA this week, to sit alongside my stocks & shares ISA. I’ll contribute £4,000 before April 5, to capitalise on the £1,000 bonus from the government. From there, I’ll invest the £5,000 total as I usually do – across a portfolio of high-quality stocks, funds and investment trusts for the long term.