Lifetime ISA help

sully1311
sully1311 Posts: 380 Forumite
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in ISAs & tax-free savings
Hi,

I’ve just opened up a Lifetime ISA and deposited the max of £4000 for this tax year. I have another lump sum of £4000 for the next tax year. I know the bonus works differently next year but don’t understand how this affects me. Should I deposit the whole £4K straight away or leave it in a higher interest rate savings account until the end of the tax year and then move it over?

Comments

  • Kim_13
    Kim_13 Posts: 2,413 Forumite
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    If you deposit a £4,000 lump sum in April, you'll get the bonus added to the account sooner. The bonus can then earn interest (if you have the cash LISA this is only 0.75%, so you may prefer to pay the lump in near to the end of the 18/19 tax year instead, as you'd earn more interest on the £4,000 at say 3% (near £120) than you would on the £5,000 (lump sum for 18/19 plus the bonus) at 0.75% (less than £40.) If you have an S&S LISA then the bonus can earn or lose money instead, depending on performance.

    You would only 'lose' the bonus if the rules changed to alter it in the meantime. As we have a fixed term parliament, this might be considered very unlikely to happen.
  • sully1311
    sully1311 Posts: 380 Forumite
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    Kim_13 wrote: »
    If you deposit a £4,000 lump sum in April, you'll get the bonus added to the account sooner. The bonus can then earn interest (if you have the cash LISA this is only 0.75%, so you may prefer to pay the lump in near to the end of the 18/19 tax year instead, as you'd earn more interest on the £4,000 at say 3% (near £120) than you would on the £5,000 (lump sum for 18/19 plus the bonus) at 0.75% (less than £40.) If you have an S&S LISA then the bonus can earn or lose money instead, depending on performance.

    You would only 'lose' the bonus if the rules changed to alter it in the meantime. As we have a fixed term parliament, this might be considered very unlikely to happen.

    Hi,

    Thanks for info but I’m pretty sure I’ve read on here you only earn interest on contributions and not the bonus?
  • Kim_13
    Kim_13 Posts: 2,413 Forumite
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    According to the MSE guide on Lifetime ISA's, you earn interest on the bonus: https://www.moneysavingexpert.com/savings/lifetime-ISAs#goldenrules. As I recall this was the reason behind the LISA being changed from the tax year 18/19 so that it pays the bonus monthly rather than annually. See 'need-to-knows' point 2.

    You don't earn a bonus on any interest or growth earned by the bonus, only on the £4,000 (or other amount if lower) that you contribute each period.
  • sully1311
    sully1311 Posts: 380 Forumite
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    Kim_13 wrote: »
    According to the MSE guide on Lifetime ISA's, you earn interest on the bonus: https://www.moneysavingexpert.com/savings/lifetime-ISAs#goldenrules. As I recall this was the reason behind the LISA being changed from the tax year 18/19 so that it pays the bonus monthly rather than annually. See 'need-to-knows' point 2.

    You don't earn a bonus on any interest or growth earned by the bonus, only on the £4,000 (or other amount if lower) that you contribute each period.

    Hi Kim,

    Thanks for this, it really helps. Now I don’t know what the better option is! The savings account I have has interest of 1.32% so should I leave it there and transfer at the end of the tax year (so £5k and 0.75% interest + £5400 in savings at 1.32%) or will I get more by transferring at the start, getting the bonus “straight away” and getting interest on £10k at 0.75%?

    I hope that makes sense.
  • Kim_13
    Kim_13 Posts: 2,413 Forumite
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    I have calculated only on the 18/19 money, as the current £5,000 (when the bonus is paid after the end of the tax year) is going to earn 0.75% in any case.

    0.0132 * 4,000 = £52.80 in the Savings account.

    0.0075 * 5,000 = £37.50 in the LISA.

    So you're slightly better off making the contribution towards the end of the next tax year. Contributing it later also keeps your options open for longer in case you need the money for another reason. You could also move the £4,000 elsewhere to improve the return before you contribute it to the LISA, but once it's in the LISA it's stuck at whatever rate Skipton decide to pay (as there are currently no other cash LISA's.)

    See the sections on bank account savings and Regular Savers for how you could improve on the 1.32% in the meantime: https://www.moneysavingexpert.com/savings/which-saving-account#savingsfountain
  • sully1311
    sully1311 Posts: 380 Forumite
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    Thanks Kim
  • Alexland
    Alexland Posts: 9,653 Forumite
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    I agree, on maths, you are better putting the contribution in towards the end of the year however don't leave it so late that you risk delays opening the account and making the deposit (ID checks, provider end of tax year high workload, etc) as getting the bonus is the most important thing.

    Also surely you can get better that 1.32% have you considered using a Nationwide 5% FlexDirect and associated 5% Regular Saver which allows for early withdrawals if required before 12 months?

    Alex
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