The Government has announced major changes to savings
Martin Lewis has shared his thoughts on an upcoming major change to savings. Chancellor Rachel Reeves unveiled several fresh policies concerning savings in her Autumn Budget.
These include changes to ISA allowances and the tax rate levied on your taxable interest earnings. One update that came as part of the statement was that the Lifetime ISA (LISA) would be substituted with a new product. HMRC has now confirmed that this new savings option will exclusively be available for purchasing your first home.
One of the complications with the Lifetime ISA is that you can use the funds either towards your first home or access them once you reach 60. Otherwise there is a 25 per cent penalty to pay on any withdrawals.
You can only use LISA funds to purchase a property worth a maximum of £450,000, meaning some first-time buyers in pricier areas such as London cannot use the funds as originally intended. A key advantage of LISAs is you receive a 25 per cent Government bonus on top of any deposits. You can contribute up to £4,000 annually, meaning you can secure up to £1,000 a year in bonus cash.
As the Government has yet to confirm the precise details on how the new product will operate, Mr Lewis was questioned on his BBC podcast for his thoughts on what savers should do now. One question came in about a previous £1 rule he has recommended numerous times to his followers.
Revisiting the £1 rule
His earlier advice was for eligible individuals to consider opening a LISA and depositing £1, as this at least provides the option to use the funds later. With the upcoming changes, Mr Lewis was questioned whether this principle remains valid.
He confirmed this could still be a wise move. He outlined his reasoning: “The Lifetime ISA can only be used as a bonus for first time buyers if it has been open for a year.
“So if you are able to have a Lifetime ISA and you are a first time buyer, which means someone who has never bought or owned a property anywhere in the world before, then my suggestion is you put a £1 in, so that you get the clock ticking, so that if in a year’s time you did want to buy a house for the first time, then you could instantly put £4,000 in, you’d get a £1,000 bonus and that could be used for your deposit.”
He did acknowledge there is a minor financial risk due to the withdrawal penalty: “I should note the risk, the risk of the £1 for everyone is that you decide it’s not going to work for you and you want to take it out, you’re going to pay a 6 percent penalty, so there’s a 6 pence risk here, and you need to be aware of that.”
This occurs because the 25 percent withdrawal charge, designed to recover the 25 percent Government bonus, also takes away part of the original sum you deposited into the account. While this might appear a minimal risk in this instance, it’s important to be aware that the more funds you’ve deposited over time, the greater the sum that withdrawal fees will claim.
‘An interesting second facility’
Mr Lewis proceeded to outline another compelling reason for depositing £1. He explained: “The Lifetime ISA offers you the ability to save towards when you’re 60, we’ll call it retirement-type savings, older age savings, that you don’t get elsewhere, you get this 25 percent boost on it.
“Generally, a pension is a better product, especially an employee pension, where the company will match pension contributions with you, than the Lifetime ISA, for most people. But the LISA is an interesting second facility.”
Given these considerations, he suggested it could be worthwhile placing that £1 into the account. Mr Lewis said: “We don’t know what will happen to the pension savings element of the LISA once we have this new product in.
“But my view would be, so that you have a chance at keeping that facility open to use it towards retirement savings if it’s right for you, even if it’s not right for you now, in case it becomes right for you in future, I would get a £1 into a Lifetime ISA even if I’d already bought my first home, just so I had the potential to have that facility open in future.”
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