Skipton Building Society will launch the UK’s first Cash Lifetime ISA tomorrow, paying a rate of just 0.5%.
The Lifetime ISA is a new type of tax-free savings account for under 40s who want to save for their first home or retirement.
Savers can put away up to £4,000 a year in an investment or cash Lifetime ISA and on top of the returns offered by the product, the Government promises to pay a 25% bonus worth up to £1,000 each year until you turn 50. Find out more in: Lifetime ISA: where to get one, savings bonus, age limit & more.
These deals have been lauded as a revolution for savers, but it seems the real winners of this product will be the banks and it’s the taxpayers that will be footing the bill.
Don't qualify for the Lifetime ISA? Compare traditional ISAs with loveMONEY
Why has Skipton launched such a low rate?
In some ways, it’s understandable that Skipton has launched such a poor rate.
Savings rates have been in the doldrums for some time thanks to the record low base rate which has been sitting at 0.25% since August last year.
But Skipton’s new Cash Lifetime ISA is actually worse than the rest of its ISA range.
The Skipton Building Society easy access cash ISA pays 0.65%, its one-year fixed rate cash ISA pays 0.85%, while its three-year ISA pays 1.15%.
The problem is that providers like Skipton know they will get savers flocking to the Lifetime ISA because of the juicy Government bonus, so can get away with offering a terrible deal.
Skipton Lifetime ISA: winners and losers
A 25-year old saving £4,000 a year for eight years will have a pot worth £40,776.53 by the age of 33, if they save into the Skipton Cash Lifetime ISA.
Of this pot, the saver would have contributed £32,000, the Government via the taxpayer would have put in £8,000 while Skipton Building Society would only have paid a lousy £776.53.
Setting the bar low
Skipton is the first provider to launch a Cash Lifetime ISA, so it’s had to set the benchmark.
However, it's likely that any bank or building society offering this product knows they can offer a miserly rate and still attract loads of funds because the taxpayer will be paying for the most attractive part of it: the Government bonus.
The Government is arguably partly to blame for creating a flawed product, with the Lifetime ISA, but banks shouldn’t be allowed to get away with offering such terrible rates.
What Skipton says
We asked Skipton why it has launched such a poor rate compared to the rest of its ISA range and whether it was hiding behind the Government’s juicy bonus.
A spokesperson told loveMONEY: “Skipton is the only provider of the cash lifetime ISA and 0.5% is our chosen rate. We have chosen a rate that is sensible and designed to take into account the current savings market, and the continued unprecedented bank Base Rate low of 0.25%.
“As an added benefit, we’re also offering savers who open a Cash Lifetime ISA the opportunity to receive £250 cashback when they take out a mortgage with Skipton or through an intermediary at a later date, which is in addition to any other cashback offer available on their mortgage product at the time.
"Together with this and the 25% bonus, we feel this is a strong account for savers.
“As one of the largest UK building societies, our purpose has always been to support people in planning and preparing for their life ahead. Being the first to give first time buyers this choice with the Cash Lifetime ISA is another way of us continuing to provide savers with a range of different options for the long term.”
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What do you think? Is the Lifetime ISA a good product to help younger savers, or is it poorly-conceived and in need of scrapping? Share your thoughts in the comments section below.