On ITV’s This Morning today, Paul called to ask the famous founder of Money saving expert what might be the best course of action for him with his inheritance money. Everyone will have different needs and goals, but Paul wanted to know if he should use it to buy a house or invest it.
The money-saving expert explained that investing could be an option, but directed Britons to other sources to find out more about this choice.
He did, however, give suggestions on accounts Paul could use to save for a house.
Mr Lewis said: ‘On savings, if you’re looking to buy a house I would look at the lifetime ISA assuming you’re between 18 and 40.
“You can open one and put up to £40,000 a year into it and the government will add 25% more to your first property.
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“You can use it after a year. That’s up to £1,000 a year free for us on your first property which must be under £450,000.
“It’s not for everyone, there are some ifs and buts, but do some reading on the Lifetime ISA to see if it’s right for you.”
A LISA is a savings and investment account that can be opened by people between the ages of 18 and 39.
People can continue to contribute to a LISA until the age of 50.
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The government adds a 25% top-up to the money paid into a LISA each year until age 50.
The maximum bonus is £1,000 and a person can contribute up to £4,000 per year, for a total of £5,000 per year.
The money can only be withdrawn once someone reaches their 60th birthday or if it is a first home costing £450,000 or less.
Withdrawing money from a LISA before age 60, except to buy a first home, means paying a 25% penalty.
This equates to a loss of just over six percent. This means making the government bonus plus a little extra. Thus, the British should think carefully before putting money aside in a LISA.
On MoneySavingExpert.com they gave this example: “Imagine you’ve saved £1,000 by April 2022 and thus earned a £250 bonus (due in May).
“So you’ll have a total of £1,250 (not including interest, for ease). If you withdrew it in June and closed the account, the 25% penalty would be £312.50. So you’ll get it back £937.50.
It is important for people to have an emergency savings fund that they can rely on in an emergency.
The average house costs 4.2 times the average salary at the end of 2020, according to the National House Price Index.
This is close to the record of 4.5 times reached in 2007 and well above the long-term average of 3.7 times earnings.
The remarkable advantage of the Lifetime ISA is that the government recharge is added to the account so that it can be saved or invested with the rest of the money.
Over time, individuals can benefit from compounding returns, when interest or investment returns are added to the pot and future interest or returns are earned from a larger sum.
Aspiring homeowners should be aware that properties bought with a LISA must cost £450,000 or less – and as property prices have risen this limit is less relevant now than when the LISA was launched in 2017.
The average age of a first time buyer is 33 (35 in London) and by 2030 it is expected to be 34.7 nationwide and 37 in London.