Gov’t reveals Lifetime Isa savers will be paid bonus monthly

According to technical details released today (15 September), the Treasury said the Lifetime Isa is a long-term savings product, meaning the bonus will be paid annually for the first year and then monthly from April 2018, therefore allowing savers to receive compound growth on the bonus.

The details also revealed savers will be able to withdraw all of their Lifetime Isa savings, including the deposit and any government bonus, when contracts are exchanged, and not on completion of a transaction.

This is unlike the Help to Buy Isa, which the Treasury branded a short-term savings product, where the property conveyancer will apply for the 25 per cent government bonus on the saver’s behalf in order to complete the purchase of their first home.

However, some experts have claimed that at that stage it might be unclear whether lenders would accept any money which is not held in cash.

This is a better system than the Help to Buy Isa, because the cash will be ready when needed Danny Cox

Danny Cox, chartered financial planner at Hargreaves Lansdown, said making the Lifetime Isa savings and the bonus available at exchange of contracts will help first time buyers’ cash flow.

He said it is a better system than the Help to Buy Isa because the cash will be ready when needed, although he advised first time buyers to take into account the timetable for the first annual bonus in their planning, otherwise they risk a shortfall at “exactly the wrong time”.

The details also revealed the bonus will be based on the savings contribution, and not on any interest or investment growth, meaning a £4,000 contribution to a stocks and shares Lifetime Isa will receive a £1,000 bonus, even if the value has risen or fallen in the meantime.

Mr Cox said Hargreaves expects a considerable amount of interest from Help to Buy Isa holders who are looking to transfer their values across to the Lifetime Isa next year

“This will give them wider choice, the benefit of stocks and shares options, higher subscription levels and bonuses paid sooner,” he said.

According to the Treasury, the government is still considering whether savers would be allowed to borrow funds from the Lifetime Isa without incurring a charge if the borrowed funds are fully repaid.

Mr Cox said this would complicate the Lisa product, and potentially risk savers bypassing the penalty to access their savings plus bonus.

“There remains opportunities for a simplification of the Isa range, which would help simplify savings decisions and should lead to higher savings rates,” he said.

But the Treasury did confirm there would be a 25 per cent penalty on the value of any amount withdrawn if savers decide to take their cash out before the age of 60, for anything other than buying their first home, unless they are terminally ill.

Nutmeg’s head of financial advice, Lisa Caplan, said she was “disappointed” to see people would effectively be charged 6.25 per cent if they decide to withdraw their money early.

She pointed out that if you invest the maximum yearly contribution of £4,000, you get a 25 per cent top up from the government to make £5,000.

But if you withdraw early, savers are penalised 25 per cent which is £1,250, leaving them with £3,750, which is 6.5 per cent less than the initial investment.

“It’s fair enough for the government to reclaim the bonus, but savers need to realise they will loose more than the bonus,” she said.

Ms Caplan said it was positive that the new Isa, set to be launched in April next year, provides a further way to save tax effectively.

However, she added: “It’s less flexible than the normal Isa and is more like a less tax effective pension in disguise.”

This update comes despite some providers saying they were dubious as to whether they will have the Lifetime Isa ready for the launch date, saying they had expected to have full details earlier so they had more time to design their offerings.

katherine.denham@ft.com