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 designed to help you buy your first home or save extra for retirement and comes with a government bonus worth up to £1,000 a year.
You'll get a 25% government bonus on top of everything you pay into a lifetime ISA. So, the more you pay in, the more the government pays in.
As you can save or invest up to £4,000 of your £20,000 ISA allowance each year in a lifetime ISA, that's up to £1,000 a year available as a free government bonus!
You can open a stocks and shares lifetime ISA, which invests your money on your behalf, or a cash lifetime ISA which earns an interest rate. Let's dive into the differences.
Get up to £1,000 extra towards your first home deposit every year with a OneFamily Lifetime ISA
Cash lifetime ISA or stocks and shares lifetime ISA – what’s the difference?
Just like other types of ISA, lifetime ISAs can be saved in cash or invested in stocks and shares. You can open both but you'll only be able to pay into one of them each tax year.
What is a cash lifetime ISA?
Cash lifetime ISAs grow by earning interest, like some savings 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.
But there is another risk to be aware of: inflation. If the interest rate you're getting is lower than prices are going up by, your money is essentially losing value.
This can be a concern particularly if house prices are going up while you're saving a deposit.
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. This gives your money better potential to keep with, or even beat, inflation, than it would have in a cash lifetime ISA.
But as the value of your account is likely to go up and down over time, there is a risk that you could have less money in your account than you've paid in when you come to withdraw.
So, you have more potential to make money, particularly if you're investing for five years or more, but also more risk of the value going down.
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 simply choose which of our three funds you'd like to invest in – each with slightly different levels of risk – and our fund managers do the hard work.
Find out more about when to save and when to invest.
With a OneFamily Lifetime ISA, you can choose the risk level you're comfortable with
Can I have a stocks and shares lifetime ISA and a cash lifetime ISA?
Technically yes, but you can only open one lifetime ISA during 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.
Need-to-knows before opening a lifetime ISA
- You must use your 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.
When you invest in 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.
Open a OneFamily Lifetime ISA
Our Lifetime ISA comes with a 25% government bonus, worth up to £1,000 a year!
Our Lifetime ISA invests in stocks and shares, so the value is likely to go up and down over time. This is normal for this type on investment, but it means there is a risk you could get back less than you put in if you withdraw at a time when the value is lower.
