If you're thinking about using a lifetime ISA to save for your first home, have you thought about whether to open one that saves in cash or one that invests in stocks and shares?
What is a lifetime ISA?
A lifetime ISA is an ISA with a difference - it's to help you buy your first home or save for retirement with a government bonus of 25% of everything you put away.
You can save or invest up to £4,000 of your £20,000 ISA allowance each year in a lifetime ISA. You'll receive a 25% government bonus on top of everything you save in a lifetime ISA up to that limit, as long as you use it to get on the property ladder or leave it there until you turn 60.
One of the important decisions you need to make when opening a lifetime ISA is whether to choose one that saves in cash or one that invests in stocks and shares.
Cash ISA or stocks and shares ISA – what’s the difference?
Just like other types of ISAs, lifetime ISAs can be saved in cash or invested in stocks and shares.
It's important to understand the risks and potential rewards of saving in cash compared to investing in stocks and shares before you make a decision.
Find out more about when to save and when to invest.
What is a cash lifetime ISA?
Cash lifetime ISAs grow by earning interest, like current accounts do. They increase with interest rates, so when you see on the news that interest rates have dropped, that's bad news if your savings are in a cash ISA and your account's interest rate isn't fixed.
Risk-wise, they are fairly safe. The amount of money in your ISA can't go down so there's no risk of you ending up with less money than you put in.
However, inflation creates another risk for cash savings.
As prices increase over time, you could find that the same amount of money can buy less when the time comes for you to withdraw it, particularly when it comes to the housing market. If your money hasn't grown as much as prices have increased by, you wouldn't be able to buy as much despite your good saving intentions.
So, if your interest rate is lower than inflation then your money is essentially losing value over time.
What is a stocks and shares lifetime ISA?
Stocks and shares lifetime ISAs aim to make money by investing in the stock market.
"Investing" typically means paying your money into an investment fund along with other investors' money. The investment fund is used to buy various different types of investments: things like shares in companies, property and corporate and government bonds.
Your money increases or decreases as the value of those assets changes. When you want to withdraw your money, you'll "sell" your shares at their current price.
Our Lifetime ISA is a stocks and shares ISA which invests in managed funds. That means you don't need to choose exactly where your money is invested. You have a choice of just two funds, one riskier than the other, and our fund managers do the hard work.
With stocks and shares ISAs, there is a risk that your money might not grow or might even fall in value and you could get back less than you put in. For this reason, we recommend only investing in stocks and shares if you plan to keep your money invested for at least five years as fluctuations in the stock market tend to even out over time.
Can I have a stocks and shares lifetime ISA and a cash lifetime ISA?
Technically yes, but you can only open one lifetime ISA in each tax year and you can only pay into one each tax year. So you can't claim the bonus on two lifetime ISAs at the same time.
With a stocks and shares lifetime ISA, the value of your account is likely to go up and down over time. This is normal for this type of investment but it does mean there's a risk that you could get back less then you put in if you withdraw your money when the value is lower.
Not sure what this risk warning means? Take a look at our guide to what to do if you're investing in an ISA and the value does down.
Invest in our stocks and shares Lifetime ISA
Need-to-knows before opening a lifetime ISA
- You must use the lifetime ISA to buy your first home or leave it invested until you turn 60 (otherwise you'll need to pay a government withdrawal charge).
- If using a lifetime ISA to build retirement savings, instead of a pension, you could lose out on employer contributions.
- If you're a first-time buyer looking to buy your first home soon, a cash lifetime ISA might be more appropriate.
- Your lifetime ISA should only be used to buy your first home after it has been open, with money in it, for at least 12 months (if you withdraw before then, you'll be charged the government withdrawal charge).
Our lifetime ISA calculator can help you understand how much a OneFamily stocks and shares Lifetime ISA could grow over time.
If you're not sure whether a product is right for your needs, you should speak to someone you trust to give you sound financial advice.
Take your first step to home ownership with a OneFamily Lifetime ISA
Feeling inspired to start building up your deposit?
Choose how much you can pay in monthly to see what your lifetime ISA could be worth in 5 years!
Please note: No more than £4,000 may be invested into a Lifetime ISA within a single tax year. This includes your initial investment and your monthly direct debit payments.
This projection shows how your lifetime ISA could grow with low, medium and high performance. Remember, projections are not a guarantee of future performance and you could get back less than you pay in.
Want to know more?
Five things to know about lifetime ISAs
We asked Product Manager, Simon, what 5 things everyone should know before opening a lifetime ISA.
How the lifetime ISA bonus works
If you're thinking of opening a lifetime ISA, you'll want to know when you're going to get the bonus and how to get as much as possible.
The lifetime ISA limits
Find out how much you can pay in, how much bonus you can get, the age restrictions and the maximum house price for using a lifetime ISA.
Lifetime ISA pros and cons
Still undecided about lifetime ISAs? This article will tell you what's good about them and what you should be aware of, so you can feel fully informed.