On ITV’s This Morning today, Paul called in to ask the well-known founder of Money Saving Expert what could be the best action for him to take with his inheritance money. Everyone will have different needs and goals, but Paul wanted to know if he should put it towards buying a house or investing it.
The Money Saving Expert explained investment could be an option, but pointed Britons towards other sources to find out more about this choice.
He did, however, give suggestions on what accounts Paul could use to save for a house.
Mr Lewis said: “On savings, if you’re looking to buy a house I’d look at the Lifetime ISA assuming you’re aged between 18 and 40.
“You can open one of those and put up to £40,000 a year in them and the Government will add 25 percent on top towards your first time property.
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“You can use it after a year. That’s up to £1,000 a year free to us on your first time property which has to be under £450,000.
“It’s not suitable to everyone, there are some ifs and buts but do some reading on the Lifetime ISA to see if it’s suitable for you.”
A LISA is a saving and investment account that can be opened by people aged between 18 and 39 years old.
People can continue paying into a LISA until the age of 50.
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The Government adds a 25 percent top-up to money contributed to a LISA each year until they’re 50.
The maximum bonus is £1,000 and someone can contribute up to £4,000 a year, for a total of £5,000 annually.
The money can only be withdrawn once someone reaches their 60th birthday or if it’s for a first home costing £450,000 or less.
Withdrawing the money from a LISA before the age of 60, unless it’s to buy a first home, means paying a 25 percent penalty charge.
This is equivalent to a loss of just over six percent. That means handing back the government bonus plus a little extra. So, Britons should think carefully before putting money away in a LISA.
On MoneySavingExpert.com they gave this example: “Imagine you saved £1,000 by April 2022 and so got a £250 bonus (due in May).
“So you’ll have £1,250 total (ignoring interest, for ease). If you withdrew it in June, and closed the account, the 25% penalty would be £312.50. So you’d get £937.50 back.”
It’s important that people have an emergency fund of savings that they could rely on in an emergency.
The average home cost 4.2 times the average salary at the end of 2020, according to the Nationwide House Price Index.
That’s close to the record high of 4.5 times reached in 2007 and well above the long-term average of 3.7 times earnings.
The stand-out advantage of the Lifetime ISA is that the government top-up is added to the account so it can be saved or invested alongside the rest of the money.
Over time individuals can benefit from compound returns, when interest or investment returns are added to the pot and future interest or returns are made from a larger sum.
Budding homeowners should be aware that properties purchased with a LISA must cost £450,000 or less – and as property prices have risen this limit is less relevant today than when the LISA launched in 2017.
The average age of a first-time buyer is 33 years old (35 in London) and by 2030 it is predicted to rise to 34.7 years old nationwide and 37 years old in London.
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