The battle for first-time buyers' savings is heating up, with Plum* and Moneybox going head-to-head to offer the UK's best Cash Lifetime ISA (LISA) interest rate. On Wednesday, Moneybox edged ahead, offering a competitive 5.30% AER. Plum then fired back with a market-leading AER of 5.51%, before Moneybox edged ahead again late on Friday with a market-leading AER of 5.55%. Both Cash Lifetime ISA offers from Plum and Moneybox include introductory bonus rates for the first 12 months.
With both providers pushing rates higher, it is an excellent time for young savers to lock in a record return. In this article, we explain what a Lifetime ISA is, how introductory bonus rates are calculated and how much interest you can earn.
What is a Lifetime ISA
If you are considering a Lifetime ISA to buy your first home or fund your retirement, there are a few rules you need to understand:
- Type of Lifetime ISA - There are two types of Lifetime ISA to choose from, a Cash Lifetime ISA that will pay interest on your cash or you could invest in a Stocks and Shares Lifetime ISA. You could, in theory, have both at the same time, but you can only pay into one of them per tax year.
- Opening age restrictions - You must be aged 18 or over, but under 40, to open a Lifetime ISA. You can continue paying into it until the day before your 50th birthday.
- The annual limit - You can pay in up to £4,000 per tax year, however, this counts towards your overall £20,000 annual ISA allowance.
- The 25% government bonus - The government adds 25% to your contributions. If you save the maximum £4,000 a year, you get £1,000 for free.
- First-time buyer rules - If buying a home, the property must cost £450,000 or less. The LISA must also have been open for at least 12 months before you can use it for the purchase.
- The withdrawal penalty - If you withdraw the money for any reason other than buying your first eligible home, turning 60, or becoming terminally ill, you will face a steep 25% withdrawal penalty. Because this penalty is applied to your total balance (your deposit plus the bonus), you will actually get back less than you originally put in.
How introductory bonus rates work
While headline rates of 5.55% and 5.51% look highly attractive, it is important to understand how they are calculated. Both Plum and Moneybox rely heavily on introductory bonus rates to boost their positions in the best buy tables.
- Moneybox - The current rate is 5.55% AER. This consists of a 2.80% underlying variable base rate and a 2.75% fixed bonus rate, also lasting for 12 months.
- Plum - The current rate is 5.51% AER. This consists of a 3.11% underlying variable base rate and a 2.40% fixed bonus rate that lasts for the first 12 months.
It is important to understand what happens once the bonus drops off. After 12 months, the Plum rate will drop to just 3.11%, while the Moneybox rate will fall to 2.80%. If you do not actively monitor your account, you will be left earning a significantly lower return in year two, and there may be better rates available elsewhere on the market. You should always review your savings accounts annually and be prepared to transfer to a new provider if you want to secure the most competitive rate. You can monitor the latest market shifts by checking our regularly updated Cash Lifetime ISA Best Buy tables.
How much interest will you get?
If you deposit the maximum £4,000 allowance into your Cash LISA, the government will add a 25% bonus of £1,000, bringing your starting balance to £5,000.
- Year one with Moneybox (5.55%) - Your £5,000 balance will generate £277.50¹ in tax-free interest.
- Year one with Plum (5.51%) - Your £5,000 balance will generate £275.50¹ in tax-free interest.
Choosing Moneybox over Plum* in this scenario yields an extra £2 in the first year. However, if you leave the £5,277.50 in Moneybox for a second year at the underlying 2.80% rate, you would only earn £147.77. This drop underlines the value of the 12-month bonus period and why it is important to review the Best Cash Lifetime ISA accounts at least once every year to ensure you are getting the best rate.
¹ Assuming the government bonus is paid immediately and earns interest for the full year.
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