Could Lifetime ISAs seriously damage your wealth?

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In April 2017, the government plans to make new Lifetime Individual Savings Accounts (LISAs) available to anyone between the ages of 18 and 40.

25% extra free

If you open one of these accounts, the great kicker is that any savings you put in before your 50th birthday will be topped up with a further 25% bonus from the government. Wow. I wish they'd been around when I was young enough to qualify.

There will be no maximum monthly contribution and you can plan to save as little or as much as you want each month, up to £4,000 a year. However, with that 25% bonus, it makes sense to save as much as you can so that your invested money works hard for you.

If you understand the laws of compounding -- where you can earn interest on the interest as well as on the initial capital invested -- you're well on the way to building your fortune, if you remain a saver and investor. If you're a borrower, on the other hand, compounding works against you, pulling you away from building your first fortune.

Here are the strings

As we might expect, the proposed Lifetime ISA comes with a few strings. In order to collect the bonus the government gives you your LISA savings must be spent on particular things, otherwise the government will snatch the bonus away AND potentially some of your own savings.

You can spend the money you've saved and the bonus if you use it for a deposit on your first home if it's worth no more than £450,000. You can also use the money you've saved and the bonus for retirement and draw it all out tax-free after your 60th birthday.

If you withdraw the money from the LISA before you're 60 and don't spend it on a house deposit, you will lose the government bonus and any interest earned on the bonus money. On top of that, the government will impose a 5% charge on the rest of your funds, which is how you could end up damaging your wealth with a Lifetime ISA.

Wealth warning

The Financial Conduct Authority (FCA) seems to be concerned that investors may not understand the difference between a pension and a LISA, which is a fair point. If you're tempted to put money in a LISA before putting it in your employer's pension fund, for example, you could miss out on extra contributions that your employer normally makes to your pension.

The FCA wants a wealth warning attached to LISAs to make sure investors understand how they work. For example, to make the further points that savers need to switch to something else after the age of 50; that if you're not buying a home, access to saved money is unavailable until the age of 60 if you want to keep the bonus; and that higher rate taxpayers may be better off with a pension because of tax relief.

Overall, I think it's worth spending time getting to grips with LISAs and planning the opportunity into your overall investment strategy for home ownership and retirement.

After all, it's not every day you get an instant 25% return from which further compounding can help grow your savings.

Other ways to grow your wealth

If you're serious about growing your wealth I'm sure you will look into the opportunity with LISAs. A chance to kick-start the compounding process like that seems too good to miss.

To help you on your quest to build life-changing wealth, the Motley Fool has produced 10 Steps To Making A Million On The Market, a report with practical steps that could help propel you forward.

The report is free to download right now. Click here.

21 PHOTOS
Vintage money-saving tips
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Vintage money-saving tips
Back then there was no choice, because the mass-produced microwaveable meal was just a glint in a marketing guru's eye, but now, cooking from scratch can save substantial sums.
The older generation learned that there were meat-free days of the week to save money, and that if you had meat you''d stretch mince with breadcrumbs, or buy cheaper joints and use every scrap.
Perfect fruit and vegetables and top-of-the-range brands are a new phenomenon. Buy generic non-branded food and fruit and vegetables in whatever size and shape is most affordable

Nowadays we rush around the supermarket grabbing things we like the look of - with little idea of what we're going to do with it. Making a list and thinking about what you buy can save you thousands of pounds over the course of a year.

There's no such thing as 'left-overs' there's just the ingredients for tomorrow's dinner. The remains of the meat can be stir-fried the next day, the vegetables blended into  soup, and the potatoes saved for bubble and squeak.

Try an experiment and eliminate everything from your life with the word disposable in the title. Not only will you save money, but your bin will take far longer to fill too.

Before you bin anything, think twice about whether you can give it a second life. Think carefully, does your granny have her tried and tested tips that she has a habit of mentioning, for instance, washing out freezer bags? If you mock, you're missing a trick and wasting money and resources.
Cutting out draughts and insulating your home properly can cut 10% off your heating bill.
Back in the 1940s when no-one had central heating, people got used to wearing another layer at home. Try lowering your thermostat gradually, and only stop when those around you start to notice - you'll be surprised how much you can save.
If you save your washing and dish washing until you have a full load every time you'll save energy and save money.
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It's always cheaper to save in advance and plan a purchase than to rush in and borrow - which could end up costing you hundreds of pounds more in interest.
Older generations typically withdraw what they can afford to spend in cash and then leave their debit card at home or deep in their wallets. This has the advantage that they don't tend to reach for a debit or credit card and spend more than they can afford.
Because the older generations couldn't borrow their way out of trouble, they tended to plan more. Give your family a financial safety and a nest egg for the future.
Back when there were only a finite number of items of clothing to go around in a neighbourhood, people borrowed from each other for special occasions. Nowadays swapping and sharing can save substantial sums
Back in the 1940s when no-one had central heating, people got used to wearing another layer at home. Try lowering your thermostat gradually, and only stop when those around you start to notice - you'll be surprised how much you can save.
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In previous generations, neighbours would think nothing of asking each other to babysit, walk their dog, or to borrow a ladder. Nowadays we pay handsomely for babysitters and dog walkers, and each have an expensive ladder gathering dust in the shed.
The army of people who come to our homes to do odd jobs is a new phenomenon for all but the very wealthy. You may well have the skills required to complete these jobs, so get stuck in.

Ditch going out for dinner or browsing round the shops for taking a walk, visiting the beach with a picnic, or holding a family DVD night.

Nowadays we're constantly striving for a bigger TV, a flashier car and a better kitchen. Generations ago people never considered that they would ever be able to afford bigger, flashier and better, so they got on with the business of enjoying what they had.
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