Great British save off: There are now at least two competing cash Lifetime Isas on offer – even if they pay the exact same rate
When George Osborne announced his grand Lifetime Isa plan it’s unlikely he pictured a world where it took more than a year from its launch for the number of savings deals to rise from just one to two.
That will soon finally happen, as Nottingham Building Society launches a cash Lifetime Isa to rival the lonely single account on offer at the moment from Skipton BS.
Both of these accounts pay the princely sum of 0.75 per cent interest – considerably below what’s on offer from a standard cash Isa or savings account.
But what’s important with the Lifetime Isa is not the interest rate, it’s the whacking great 25 per cent government bonus paid on up to £4,000-a-year.
That bonus is a level of a return you would need to wait 25 years to achieve on money paid into a standard savings account paying 1.5 per cent interest.
It’s difficult to know why banks and building societies have been so cold on offering cash Lifetime Isas, but their lack of enthusiasm speaks volumes about how it is seen as a gimmick with a short shelf life.
Investment firms have been a touch more interested, but even then just six offer stocks and shares versions, so it has hardly set the world on fire there either.
The problem with the Lifetime Isa lies in its attempt to marry saving for a first home with building a retirement pot.
The concept – from a Chancellor big on ideas, but not so hot on detail – was to deal with the issue where people said they couldn’t save for retirement because they also needed to save for a home.
The plan to solve that problem was a product where you could do both and get bunged a juicy bonus, delivering the equivalent of saving from basic rate tax-free income – similar to pension tax relief.
You must be under 40 to open one and can pay in money until the age of 50 to earn that 25 per cent bonus on contributions of up to £4,000 a year, but it has to go on a first home or you can’t access it until the age of 60, without a hefty penalty.
Yet, this brainwave falls at an early hurdle.
People tend to save for house deposits they will need in the near future, whereas traditional wisdom has it that you should only invest over the medium to long-term, typically at least five years.
So combining both goals in the same pot doesn’t really work, whether you choose the cash or investment flavour of account.
Save in cash and you miss out on potentially better investment returns you need for your long-term pension aim.
Invest and get unlucky with short-term stock market moves and you risk your house deposit being ravaged when you need it.
And these issues don’t even take into account the problem of spending your retirement pot on a house, potentially missing out on employer pension contributions, and the better tax relief offered on pensions for 40 per cent taxpayers.
A pension beats a Lifetime Isa for retirement saving, unless you are high-earning enough to have maxed out your pension annual contribution allowance or hit the lifetime limit (an unlikely scenario for most under-40s).
So, the Lifetime Isa is a bit of a duff product… but it can also be a great deal.
If you are saving for a first home then get one (or if you are older tell your children or grandchildren to open one if they are).
The government is offering a guaranteed immediate 25 per cent return – and that is an offer worth taking, even if it should never have been made.