Lifetime ISA

Janey1a

My son is considering a LISA. Trying to get our heads around best ways to contribute etc.

LISA we’ve found has an introductory rate for the first year then the interest drops to 2.8%. He intends to pay in £4000 in year one.
He also has a cash ISA which is paying around 4% and he can withdraw whenever he likes. So, after the first year, when the LISA rate drops, I’m thinking he would be better to save into his cash ISA to get the higher interest rate each month, then towards the end of the second year of the LISA he should pay in a lump sum from his cash ISA of up to £4000. He would then get the 2.8% interest on that lump sum, together with the existing balance.

Am I understanding it correctly and this is the best way to maximum possible interest?

Ed-1

https://forums.moneysavingexpert.com/discussion/6684105/lifetime-isa

This should be on the savings board. You cannot withdraw from a LISA without a 25% charge being applied, except after age 60 or for purchasing a first property.

kimwp

Be careful about how you transfer the money from the isa to the Lisa regarding annual isa allowances.

Also consider transferring the Lisa to another provider if the interest rates are low.

Does the extra interest on the 4k in the ISA outweigh the interest that your son would receive on the additional 1k from the government if he put the 4k in the Lisa at the start of the year, therefore receiving the 1k earlier?

dcs34

Assuming you understand the above about withdrawal penalties (and do note a 25% charge on withdrawals means a loss of 6.25% of the original deposit withdrawn), then I'd also consider:

• Yes if Cash ISA rates are higher than Cash LISA rates, you can hold the money in the ISA for most of the year and then transfer the £4k into the LISA at the end of the tax year (I'd always do it a few weeks early in case of any delays) - when I started my LISA it's rate was higher than the average savings interest rate; in more recent years I've kept my £4k elsewhere and moved it across at the last minute
• Be aware you can transfer a LISA between providers (some have better processes to do this, and others don't!) so he is not locked into one provider, and can shop around once a 12 month bonus ends
• Understand that a Cash ISA can be flexible (allow you to replace cash withdrawn during the same tax year beyond your ISA allowance), but a Cash LISA can't be by definition
• Be aware that the most attractive LISA products/offers are really loss-leaders for the provider to cross-sell you their mortgage broker/conveyancing services
• Note that once the Government announces details of their new 'first time buyer' ISA (FTBISA?) it is likely the current LISA market will become very poor, with little incentive for providers to offer attractive rates whilst everyone focuses on the shiny new thing
• Understand the limitations with the LISA including withdrawal restrictions/penalties, £450k property price cap (which, given the above, is even less likely to be adjusted going forwards), requirement to take out a mortgage, issues if he inherits a property etc.

kimwp

https://forums.moneysavingexpert.com/discussion/comment/82144434#Comment_82144434

What's the difference between the two options? 5k at 4% attracts the same interest as 4k at 5%.

dcs34

https://forums.moneysavingexpert.com/discussion/comment/82144437#Comment_82144437

Once you've put the £4k into the LISA it isn't leaving anytime soon, so you've closed off options if those EA rates rise above 5%.

(Or in my case, regular saver rates started to rise way ahead of the LISA rates, so it made more sense to drop my monthly income into those, and then only scramble around to fund the LISA at the end of each tax year. Now the same applies with the Santander Edge at 6%).