Do you have a child or grandchild who will be looking to buy their first home? Will they one day want to retire?
If so, they may be considering a Lifetime ISA (Individual Saving account), a tax-efficient way to help them meet these goals. As the second Lifetime Cash ISA is launched by the Nottingham Building Society, it’s time to look at the differences between Cash and Stocks & Shares and investigate how each may be suited to different circumstances and goals.
What’s a Lifetime ISA?
Let’s start with the basics.
A Lifetime ISA is a savings and investment product aimed at younger people who want to start saving toward their first home deposit or retirement.
Lifetime ISAs can be opened by anyone over 18 and under 40, but you can continue to make deposits into the account until you reach 50.
Every year, you can deposit a maximum of £4,000 into a Lifetime ISA, this forms part of your Annual ISA Limit of £20,000 (For the 2018/19 tax year). At the end of the tax year, a government bonus equal to 25% of the previous year’s deposits will be automatically added to the total.
Money held in a Lifetime ISA can be used for a home deposit or retirement income, after the age of 60 without incurring any penalties. However, withdrawing money for any other purpose will result in a 25% penalty charge. This will both remove the government bonus and eat into your original deposit.
Lifetime ISAs are tax-efficient, for example, any interest you receive from a Cash ISA is tax-free.
What’s the difference between Cash and Stocks & Shares Lifetime ISAs?
A Stocks & Shares Lifetime ISA allows you to invest in funds, which in turn will hold equities (Stocks & Shares or other assets, which will carry a risk to your capital). In contrast, Cash ISAs are best simply thought of as savings accounts, where your money is held on deposit, interest is added and providing you stay within the FSCS limits, your capital is not at risk.
That means a Stocks & Shares account has much more potential for growth. Though, as with any investment, it does involve risk and the value of your money can fall as well as rise. Money held in Cash ISAs will attract interest, but with many banks and building societies offering rates which do not keep up with inflation, there is a risk that your money will lose value in real terms.
How to use Cash and Stocks & Shares accounts
Due to the reduced risk, but lack of long-term growth, Cash Lifetime ISAs are best positioned for short-term saving goals. That means that, when saving for a house deposit within the next five years or so, it is sensible to do so using a Cash Lifetime ISA, rather than Stocks & Shares.
Due to the nature of investments, a Stocks & Shares ISA is usually better suited to goals which afford enough time for any Stock Market wobbles to level out. If used to save for a short-term goal, a drop in value at an inopportune moment could cause difficulty. But for long-term aims, the natural volatility of the stock market becomes less of a concern, with the objective being real, above-inflation returns (though that is not guaranteed).
The benefit of flexibility
A Lifetime ISA allows you to put money into both cash and Stocks & Shares, matching the type of Lifetime ISA to your goal. However, it should be noted that, if you have access to a Workplace Pension, that should be your priority when planning for retirement.
Of course, the decision of how to use your Lifetime ISA is up to you, but the key is to make sure that however you use it, is suited to your aims and objectives and forms a productive part of your financial plan.
For more information on this, or to get help for your children or grandchildren, feel free to get in touch with us.
