ISAs are changing: what to do now (cash, shares, LISAs) | State Pension Tax Help | Interest rate rises

Interest rates rose by 0.25% just as we started recording, so what happens next? Martin explains what the latest increase means for mortgages, savings and borrowing, and looks at where rates could be heading in the months ahead. The big topic is ISAs. Following major Budget changes, Martin tackles the future of Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs and the brand-new First Time Buyers ISA. With questions flooding in from listeners, he breaks down the new rules, explains when each type of ISA is likely to be right for you, and shares tips on how to make the most of your tax-free savings allowances. Plus, Mastermind returns with a deep dive into how the new State Pension Tax Allowance works. Martin answers your questions, explains who is affected, and helps you understand what the changes could mean for your retirement income. If you want to ask Martin a question, you now can! His Question Time podcast lets you ask Martin absolutely anything and everything (within reason!). So, if you’ve always wanted to know which golf club he likes best, if he stands or walks on an escalator, or you have a very complicated question about your finances, email it to [email protected] mailto:[email protected].

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:47Martin Lewis?

  You get £20,000 you can put in cash and shares. You have a right to transfer them across. It's very complicated. It's complicated for a good reason. I can give you a rule of thumb. Please go and put this pound in a lifetime ISA and you'll be starting an 18 year off well by giving them a facility that's going to disappear in a couple of years. Well, I don't need a chart when I've got a rule of thumb. I mean, a rule of thumb trumps a chart. I'm very proud to be the Scrooge. Bah, I'm bug. Hello, I'm Martin Lewis and this is the cunningly named The Martin Lewis Podcast. I do wonder what that's going to be about. And this is our big topic episode, where each week we lead on one main subject to help you save. Now, usually, most of it comes from my BBC Radio 5 live show with Adrian Charles, but there's also bonus money saving tips and tricks for you, you lucky, lucky podcast listeners.

• 2:32Martin Lewis?

  And in today's episode, what will happen to interest rates? They rose by a quarter of a percentage point just as we started recording. So we'll have a quick chat about the future for variable and fixed rate mortgages and savings. Then it's on to the big topic, the future of ISAs. It was all change and no change in the budget. There are new rules we didn't expect to happen, and rule changes we did expect to happen that aren't changing. That applies to cash ISAs, shares ISAs, lifetime ISAs, the new first time buyers ISAs, and we'll be mentioning the Help to Buy ISA too. We are swamped with ISA questions. Luckily, often, an ISA is nicer. So if you want to know whether an ISA is nicer for you, or exactly what to do about it, and how to maximise your ISAs to get most advantage of tax free savings or investings, we're going to go through everything you've ever

• 3:14Martin Lewis?

  wanted to know and people wanted to ask. They have asked, I've answered, and we'll talk about that. Then it's on to Mastermind, and it's an important topic. It's all on how the new state pension tax allowance, starting in April 2027, will work. And I'll be taking your questions on that one too. There's a lot to do. Play the theme tune.

• 3:51Martin Lewis?

  Now, let's start with the news that happened the moment I sat down to record the pod. You see my bum going on a seat, and things change. The Bank of England announced that the UK base rate was to go up from 3.75% to 4%, and that news was just being broken by Hannah Mullein on Five Live.

• 4:10Speaker 04

  Yes. Hi, Adrian. Yeah, we've just had that interest rate decision from the Bank of England. We were expecting them to put up rates from 3.75% to 4%, and they have done that. So that is the first interest rate rise for three years. So quite a significant moment. And we were expecting that today. Why? Well, because inflation is heading in the wrong direction. And unfortunately for the government, a lot of that inflationary pressure is coming from the conflict between the US, Israel and Iran. And that is pushing up the oil price. We're seeing it in the petrol pumps. We're seeing it in energy costs. And what they're trying to do now is stop that from spreading its way into other things. So the hope is that they can encourage us to spend less and bring that inflationary

• 4:56Speaker 04

  pressure down. So yeah, rates going up to 4% today.

• 4:59Speaker 05

  Martin Lewis is with us, so it's the expected rise up to 4%. What are your thoughts, Martin?

• 5:06Martin Lewis?

  Well, the most important word in the sentence you've just said is expected. Right, which actually means the impact on mortgages and savings is depends on whether you're talking about variable savings or fixed rate savings, variable mortgages or fixed rate mortgages. Clearly, if you're on a variable mortgage or a tracker deal, your interest rate is going to go up by around a quarter of a percent. If you're on a tracker deal, it's exactly a quarter of a percent. If you're on a standard variable rate, it's likely to be a quarter of a percent. But lenders can change it with their own competitive whims. So that's worth looking at. If you're on a fixed deal, nothing changes. Now, when people come off fixes, rates are going to be higher. We know that. Whether fixed rates will actually be higher due to today's announcement is a different matter, though. Because what

• 5:51Martin Lewis?

  you have to understand is the markets had already factored in at least four base rate rises over the next year. And that's priced into the swap rates, which is effectively the market's indication of the future cost of financing. That is already baked in. Now, really bizarrely, what we could actually see is if the Bank of England over the next year puts rates up, but not as much as the markets have factored in, we could see fixed rates getting cheaper, not more expensive, because they're based on future expectations. They're not based on current interest rates. Today's was so baked in, I'm not sure it will have much impact on the rate that you can fix that anyway. Arguably, the rate you

• 6:32Martin Lewis?

  could fix that could potentially get slightly, and I'm only talking, you know, 0.01, 0.05% cheaper over the next few days, because there's a potential increase in the chance of de-escalation in the Middle East. That's seen oil prices come down. That's seen natural gas prices come down. That means there's less inflationary pressure, which means the future outlook for interest rates might be slightly lower than we thought it was. And that could actually, bizarrely, the base rate goes up, fixed rates could come down. I'm not saying it will. I'm saying it could. We'd just have to wait and see exactly how the markets interpret it. But it's nowhere near as straightforward as fixed rates will now go up because the base rate has gone up. Variable rates will, yes. We'll expect to see easy access savings rates increase because they're variable rates. But the rate

• 7:14Martin Lewis?

  at which you can fix a mortgage and the rate at which you can fix a saving does not move directly with the Bank of England base rate. And bizarrely, hopefully, I've now explained why, there is just as much chance of it dropping slightly as it rising slightly. And we'll have to wait to see what happens over the next few days.

• 7:29Speaker 05

  Let's just go back to Hannah. Have you got the voting? Because this kind of gives us some sense where we might be going in future meetings.

• 7:36Speaker 04

  It's been really split in the last few, in the last few meetings. But in this one, there were eight votes voting for a rise of 0.25%. And the one remaining vote was also voting for a rise, but of 0.5% and even bigger rise. So yeah, everybody in favour that something had to change and that a rise was needed to try and curb inflation. So that's quite an interesting perspective there from the Bank of England.

• 7:58Martin Lewis?

  So fascinating. And I think, I mean, we were all pretty sure it was going up. There's a very little doubt. It was in the sort of 99.9% range today. What is very interesting is the next year. Now, when you start to look at this, I've talked about where swap rates are. And again, that is basically the market's prediction of where rates will be. Now, that is based on risk. So that isn't saying rates will be here. That's looking at all the different risk possibilities that rates could go up very substantially, or they couldn't go up at all, and sort of balancing it in the middle and pricing that in. I mean, obviously, it's a market, so it's based on sentiment and all those things. But that's the concept. If you talk to economists who are predicting as opposed to factoring in different risk outputs, what economists have been saying to me, that I've spoken to, is

• 8:42Martin Lewis?

  they're expecting to see two or three rate rises over the next year. So instead of where the markets are looking at it peaking at 4.755%, that the economists are looking at it peaking at 4.25, 4.5%, and then coming down after a year, a year and a half. Because that's because they're trying to predict an outcome, rather than having to factor in all the different variant risks that are out there. Now, clearly, neither of those are right. Who knows what happens? We could have a declaration of peace in Ukraine and in the Middle East. That would bring future outlooks of rates down quite rapidly, because it would bring down the cost of energy, and energy is the big factor that's feeding into inflation. We could have, you know, hideous escalation in those two conflicts, more than we expect so far, that would move it the other way. So nobody knows. But I think we

• 9:25Martin Lewis?

  are in an interesting position where you can look and say, well, if the economists are right, the market has overpriced future, future fixed rates, which actually means the cost of fixes could come down rather than up, even though the base rate is going up. Am I making any sense?

• 9:39Speaker 05

  You are making plenty of sense, as usual. Okay. Thanks, Hannah. I've got another question about mortgages. You're basically saying, don't panic or don't do anything dramatic on the basis of this decision. You know, it's...

• 9:54Martin Lewis?

  What's actually very interesting, if you look at it right now, and what many people are asking me, and when I've spoken to mortgage brokers about it and economists about it, is this debate, if you're one of those up to 2 million people coming off a very cheap fix, what do you do? Now, standard logic in mortgages is most people go for fixes because that gives you surety, that you can budget, and you know exactly what you're going to pay and exactly how it works. But right now, the differential between the cheapest fixes and the cheapest tracker rates, well, I haven't looked this week, but it is roughly 0.8, 0.9%. So you've just had a rate rise, so that's gone now, so we're now at whatever it is, 0.65%. You've basically got room for at least two interest rate rises before your tracker

• 10:39Martin Lewis?

  becomes more expensive than your cheapest fix. And if what the economists I've been talking to, when we've looked at a few of them, and that most of them are lower than those swap rates, are saying, then it is a relatively decent bet right now, and go and speak to your mortgage broker about it, to look at your personal finance situations, to be going on to a tracker for, say, two years. If the economists are right, you go on to a tracker for two years, you'll pay less than you would on a fix, and then hopefully interest rates will be down after that, and fix rates will be cheaper. I've already said economists are not definitely right, but that's the logical conclusion you get from looking at the economists compared to the swap rates, which is what fixed rates are actually priced on. Now, whether you should do that or not, that would be in a perfect market, if you like,

• 11:21Martin Lewis?

  that you have absolute room and you're just looking at weighing up, well, what would be cheapest for me? That isn't the case for many people. Many people also have to factor in surety. How much do I need to know? How important for me is the guarantee of what I'll pay that I get with a fix rate, even if it's going to be more expensive? If you're doing it for surety, the more you need surety, the more you should hedge towards fixing, and the more you should hedge towards fixing longer, because if you can afford that mortgage, then you're going to get that mortgage rate for that set period of time. And even if you look back and with hindsight, it wasn't the right thing to do, that doesn't mean it was a bad decision if you made the decision for surety. So the real point that I'm going at, it was more about this subtlety, that when people

• 12:03Martin Lewis?

  talk about the impact of interest rates, they say mortgage rates will go up. Well, that is absolutely true for variable and tracker mortgages. But we're in this strange scenario at the time, where so many rate rises already been factored into fixes, that certainly over the next six months, it's not necessarily true that when the base rate goes up, that will see a big jump of a similar amount in the rate that you can fix at, because that's already factored into an extent.

• 12:30Speaker 05

  But if you're on a variable rate, you're going to get a letter imminently.

• 12:33Martin Lewis?

  Absolutely. And you're going to add, what, £12 a month, £100,000 of mortgage to your cost, and that is going to happen. But I'm hoping there aren't that many people surprised by this. I mean, this has been more widely flagged than the end of a Formula One race, you know. It's absolutely, we've all been saying it for a long time. The real question is not about today, the real question is where we will be in a year's time, and that's the more difficult one.

• 12:58Speaker 05

  Shall we get into ISAs then? How are we going to tackle this? What are my instructions?

• 13:04Martin Lewis?

  So what we're going to do is we're going to go through a different section of ISAs. I'm going to give you a summary at the start, and then it's all about the Q and As. So we'll start with the cash ISA and shares ISA. The big budget change was no change, but no change is a change, because the plans were, for those aged under 65 in April 2027, the amount that you could put into a cash ISA per tax year was to reduce from £20,000 to £12,000, where there was no change for the shares ISA. So the total was still 20 grand, but they were reducing what you could put in. John Healy announced last week, scrapped, gone, not happening. The ISA regime for the cash ISA is going to say exactly the same it is now, which

• 13:45Martin Lewis?

  means you are able to save up to £20,000 per tax year in a cash ISA, regardless of age, as long as you're aged over 18, because we're talking about adult ISAs here. So the big change is no change, so all the stuff that people have been stressed about and worried about, and everything that we've been going into over the last year, that has gone. Now, just a reminder of what an ISA is. An ISA, an individual savings account, is a tax wrapper. It's something that you can put around savings, or you can put around investments, that means it's not taxable. Do you know the difference between not taxed and not taxable?

• 14:17Speaker 05

  Go on, try me.

• 14:19Martin Lewis?

  I'm asking, go on.

• 14:20Speaker 05

  Well, I think so, yes, but I can't explain now.

• 14:25Martin Lewis?

  All right, so shall I do? It is my job.

• 14:28Speaker 05

  It's one of those.

• 14:29Martin Lewis?

  All right, not taxed, I mean, let's think of it very simply. You're allowed to earn up to £12,570 a year from any earnings under your personal allowance, most people are anyway, and it's not taxed, you don't pay tax on it.

• 14:40Speaker 05

  Yeah.

• 14:41Martin Lewis?

  But it's still taxable.

• 14:42Speaker 05

  Yeah.

• 14:43Martin Lewis?

  Because it counts towards your allowance. ISA interest and ISA growth in a shares ISA, the capital gains, is not taxable.

• 14:51Speaker 05

  Yeah.

• 14:52Martin Lewis?

  So it doesn't count towards your allowances. So for example, if you earned £1,000 of interest in a cash ISA, it wouldn't count towards your personal allowance, it doesn't count towards your personal savings allowance.

• 15:01Speaker 05

  In terms of income tax.

• 15:02Martin Lewis?

  Or your personal savings allowance, or your starter rate of savings allowance, it doesn't count because it's not taxable. It's not something that can ever be taxed, as opposed to not something that is not taxed because you're within an allowance. So anything inside an ISA is not taxable for income tax, capital gains, or dividends tax purposes. It is taxable for inheritance tax. So when you, the way I tend to describe it, and have done for years, so let's just do it again now, as I always do it, is imagine you've got a couple of cakes here. You've got one that's a strawberry cake, that's your shares, and one that's a chocolate cake, that's your cash. Strawberry starts with an S, and chocolate starts with a C. I'm not being very clever. You get given a £20,000 piece of cling film. Now, you can choose whether you're putting your strawberry cake in there, or whether you're putting your chocolate cake in there, or whether you're putting a bit of strawberry

• 15:47Martin Lewis?

  and a bit of chocolate, you've got a maximum £20,000. Once you put that cake inside the cling film, it hasn't changed, the savings account is still a savings account, the investment account is still an investment account, nothing has changed, except one thing. Now, because it's in cling film, if the tax man or woman wanted to come and bite it, they open their mouths, but they can't bite it because it's protected, and that's the only difference. So many people think things about ISAs, oh, I don't want to lock my money away in a cash ISA, I'll just go for savings. There are easy access cash ISAs, you can take your money out of when you want, there are fixed cash ISAs. You know, you can have shares ISAs that you can choose an enormous range of investment funds and shares and everything in, in many ways, not quite exactly, but just like you're doing normal investing, right? There are a few things you can't put in there.

• 16:29Martin Lewis?

  I believe, I'd have to double check, you can even put a property investment fund of a certain type inside your ISA. So all an ISA is, it's not a product, it's a tax wrapper. Think of the cling film, everybody. I'm not sure that would make a good tag for a film, but think of the cling film. Let's do some questions.

• 16:46Speaker 05

  Let's get the questions then. Tony says, are the government still taxing cash held in a stocks shares ISA, or is this now abandoned following the recent U-turn on ISA allowances? You'd better explain the principle then.

• 16:58Martin Lewis?

  So the principle was, they were bringing, because of the cash ISA reduction, they were bringing in anti-avoidance rules to stop people effectively using their shares ISA to be a cash ISA. But that's gone as well. All the anti-avoidance rules that were being set up to start in April 2027, they've been thrown out with the cash ISA cut. It's gone. No need to worry about it.

• 17:17Speaker 05

  Okay. Phil, can you clarify transferring ISAs? I know you can transfer one cash ISA to another, but can you transfer funds from one stocks and shares ISA, or funds from a cash ISA to a stocks and shares ISA, or a stocks and shares ISA to a cash ISA?

• 17:34Martin Lewis?

  So right now, you can transfer from a cash ISA to a shares ISA, you can transfer from a shares ISA to a cash ISA. The plan was, next April, you wouldn't be able to transfer from a shares ISA to a cash ISA, but that was an anti-avoidance rule, and I've said about anti-avoidance rules, they have gone. So that rule is gone, so you will continue to be able to. You can transfer from a cash ISA to a cash ISA, you can transfer from a shares ISA to a shares ISA. The most important thing you do is to transfer, you do not withdraw your money, you go to the new provider you want to transfer to, you fill out their transfer form, and they move the money across for you. On shares, though, you have to be careful, because effectively, you're not practically moving across, they might not offer exactly the same funds. So you're transforming the platform, and it can be worthwhile, and it can work really

• 18:19Martin Lewis?

  well, and because it's within an ISA, there's no capital gains for doing so, but look at the process they do it. Are they selling in the old fund to then rebuy the new one? And if that were to take a day or two, would you therefore be at risk of a movement of the share price at the time? So there's a couple of things to check when you're doing that, but the general rule is, yes, you can do it, and it is now not going to be changing in April 2027. Hurrah.

• 18:41Speaker 05

  Okay. Steve says, there should be just one ISA wrapper, it could be for cash, or stocks and shares, or other investments. Set it at 20K for the lot, offer incentives within that one wrapper for new investors, make it flexible too, why not?

• 18:55Martin Lewis?

  I mean, I think the reason is, there are some investment firms who don't offer savings, and some savings firms who don't offer investment, and the problem you'd have from my, with my money-saving expert hat on, is what if you've got one firm that's best for a cash ISA, and one firm that's best for a shares ISA, and you want to have both? I wouldn't suggest you put them all in the shares ISA or in the cash ISA. But effectively, you do, in the bigger picture, you get £20,000 you can put in cash and shares, you have a right to transfer them across. So, but not necessarily with one provider, because as my general rule with one provider goes, loyalty doesn't pay, there are very few providers who are top of the table for more than one thing, so why would you want to have it all wrapped into one? But I get the point in principle, though, I understand where he's coming from.

• 19:34Speaker 05

  Karen says, can I ask, what amount do you pay tax on an ordinary savings account interest? So what's the allowance then?

• 19:41Martin Lewis?

  It's very complicated.

• 19:42Speaker 05

  Can it be? How can they make this complicated?

• 19:44Martin Lewis?

  Well, it's complicated for a good reason.

• 19:46Speaker 05

  Right, okay.

• 19:47Martin Lewis?

  Okay? Because you have a shed load of allowances on savings.

• 19:50Speaker 05

  Right.

• 19:51Martin Lewis?

  So let's start with the first one, we've already talked about it, you can earn up to £12,570 per tax year from any source, including savings interest, and you don't pay tax on it, your personal allowance. You've then got a thing called the starter rate of savings, which is designed for people who have low earned income and high savings interest, AKA pensioners often. You then, effectively, that means, I'm not going to go into the technicals, go and look it up, I've explained it in detail in previous podcasts, but it'd take about 10 minutes. You can earn up to £18,570 a year as somebody who's got low earned income and high savings interest, tax-free. That then disappears. The next one is your personal savings allowance.

• 20:31Martin Lewis?

  A basic rate taxpayer can earn a thousand pounds of interest a year on, from any source outside of an ISA, tax-free. And so if you think about that, the current top easy access savings rate is just under 5%. So that means you've got to have at least 20,000 pounds outside of an ISA before you're starting to pay tax on it. Higher rate taxpayer, 40% taxpayer, has 500 pounds. A top rate taxpayer, they don't get one of these. Then you've got your cash ISAs or your shares ISAs, which are not taxable. You've also got premium bonds, where you don't have a yearly allowance, you have a maximum 50,000 pounds that you can put in tax-free. I'm generally not the bigger fan of premium bonds for small amounts and for people who don't pay tax on savings. But if you're a, say, a higher rate taxpayer, you do pay tax on savings and you're putting

• 21:15Martin Lewis?

  a larger amount in, then premium bonds can be a decent bet compared to other savings. Though again, if you're putting stuff away for a long period, over five years, you should be looking at investing more than saving anyway, and it's just important for me to state that. So that's the reason it's not so easy to say at what point you start to pay tax, because it depends on which allowances you're able to for and what you're using. But I actually think that wasn't the question. Forgive me. Because there is a change coming next April to this. And actually, I've had quite a few people ask me something on this, and I'm just, I'm going to expand it because I've seen another question. Some people are saying, you say it's going up 4%, the government are saying it's going up 2%, who's right? We are both right.

• 21:54Martin Lewis?

  So, next April, the rate of tax you pay on taxable savings, so outside of an ISA, outside of your personal allowance, and also on property income, is increasing for a basic rate taxpayer from 20 to 24%, for a higher rate taxpayer from 40 to 44%, for a top rate taxpayer from 45 to 49%. So you can see the increase is four percentage points on each one. Why are the government saying two? Because it had already been announced it was going up by 2% in April. They've increased it, so it's going up by 4%. So the amount it was increased by the budget is two percentage points, because there was already a plan to increase it by two percentage point.

• 22:38Martin Lewis?

  But the total amount it will go up in April is four percentage points.

• 22:42Speaker 05

  Yeah.

• 22:43Martin Lewis?

  You're with what I'm saying?

• 22:44Speaker 05

  Yeah, yeah.

• 22:45Martin Lewis?

  So it's basically what had been pre-announced and what is new. So I'm just explaining it the simple way. The amount of tax you pay on savings interest outside of an ISA, if it's taxable and outside of your allowance, will go up by four percentage points from April.

• 22:56Speaker 05

  It's a more general ISA question?

• 23:00Martin Lewis?

  Yeah, just go for it.

• 23:01Speaker 05

  Shall we get into them? Vicky, who's a nurse in her 50s.

• 23:04Martin Lewis?

  We have a lot of questions, I want to get as many through as possible.

• 23:06Speaker 05

  She's in her 50s, is Vicky a nurse, never had an ISA? How do you even start, choose which one to go for? She's a 54-year-old nurse, homeowner, has been working really hard to build up some savings for the first time in her life, finds all this talk about ISAs a bit confusing.

• 23:20Martin Lewis?

  So, look, the answer is actually relatively simple. The real decision is, do you want to invest or do you want to save? Right? It's not, do I want a cash ISA or do I want a shares ISA or do I want an ISA, do I not want an ISA? It's do you want to save or do you want to invest? So she said she's saving, so we'll look at it from a savings perspective first. Right, Adrian, look into my eyes, don't look around my eyes, look into my eyes, you're watching and you're under.

• 23:42Speaker 05

  Yeah.

• 23:43Martin Lewis?

  A cash ISA is just a savings account you don't pay tax on.

• 23:47Speaker 05

  Yeah.

• 23:48Martin Lewis?

  A cash ISA is just a savings account you don't pay tax on. Everybody listening, whenever you hear a cash ISA, I want your heads to say, it's just a savings account?

• 23:57Speaker 05

  Which you don't pay tax on.

• 24:00Martin Lewis?

  Exactly.

• 24:01Speaker 05

  Can that count towards my mastermind?

• 24:02Martin Lewis?

  No, but I enjoyed the way that you did it. So that's all a cash ISA is. So then your question is, will I pay tax on savings anyway? If I won't pay tax on savings anyway, what you look at is, is the top paying cash ISA of the type I want, whether it's easy access or fixed, paying more or less than the top normal savings? If the top paying cash ISA is paying more, even if there isn't a tax benefit, as it's just a savings account you don't pay tax on, you may as well put it in a cash ISA. And currently, right now, for most people, trading 212 is the top payer is paying more than the top easy access savings, so you put 20 grand, up to 20 grand in there. If you are paying tax on savings and you would pay tax on savings, like you're an additional rate taxpayer, then a cash ISA has even more benefits, because you're not having 20 or

• 24:46Martin Lewis?

  soon to be 24%, or 40 or soon to be 44%, or 45 or soon to be 49% of tax taken off the interest. The other way is shares. And again, if you have a choice, if you're saving and investing, I would always tend to use my ISA first for investing. Because the potential tax, if you have an investment that goes very well, is much bigger than it is on savings, because hopefully, investments done right and that goes well for you will grow much quicker than savings, therefore, the taxable growth will be much bigger, and therefore, you probably, especially if you're doing a larger amount, you'd want to use your shares in ISA first. I would always say, if you're putting money away that you don't need for more than five years, then you want to focus on investing, because that will tend, in a broad spread

• 25:29Martin Lewis?

  of investments, something like a global index tracker, which is what the independent financial advisers always tell me is the start point to go to, will tend to outperform savings, has in the past, and we hope it will do in the future. So then, so if you're asking cash ISA or shares ISA, you want to go shares ISA. As for where you get them, let's just say, there are many good guides on the internet which go into detail of what the best rates are and the best platform charges available, and I would start going and look those up, rather than going into sort of product-by-product details right now.

• 25:55Speaker 05

  Okay, Susan, the interest on the ISA is tax-free, but when you put it in a savings account, it accumulates and it mounts up and becomes taxable interest. How is this fair?

• 26:05Martin Lewis?

  Yeah, we had a couple of questions in on that, and I sort of, I almost struggle to understand the difficulty, but I think when you, a cash ISA is just a savings account you don't pay tax on. So when you put money in your cash ISA, you get interest and it's not taxed. When you take it out of the cash ISA, some people think suddenly it's then taxed. It's not. You know, if I've got 50,000 pounds, lucky enough, in the cash ISA and I take out 20,000 pounds, I take out 20,000 pounds. There's no tax on me taking out that 20,000 pounds. But if I then save that 20,000 pounds in a normal savings account.

• 26:41Speaker 05

  It becomes taxable.

• 26:42Martin Lewis?

  Yeah, because it's a normal savings account. And so how's it fair? Well, don't take it out of the cash ISA if you don't want it to be taxed, would be the answer. And if you've used up your cash ISA limit, so you haven't got any more, well, that's sort of what the tax system is about. So unless I'm misunderstanding the question, I think there might be a confusion in there.

• 26:57Speaker 05

  Okay. Jill, I have a fixed rate ISA that has just matured, I need the interest from my savings to subsidise my measly pension. Measly, you don't hear that word very often, do you?

• 27:08Martin Lewis?

  I think you're hearing it more and more in regards to pensions, that many are saying.

• 27:11Speaker 05

  Measly, well, I'm sorry to hear your pension is measly.

• 27:14Martin Lewis?

  We'll be getting on to pension tax later, about measly amounts.

• 27:17Speaker 05

  Should I reinvest the ISA or put it in bonds? Premium bonds, I assume, I mean, so I can get interest from them?

• 27:24Martin Lewis?

  And I think she's talking about a cash ISA. She uses the term invest, but I think she's talking about a cash ISA, isn't she, from the initial statement?

• 27:29Speaker 05

  Yes.

• 27:30Martin Lewis?

  Again.

• 27:31Speaker 05

  A fixed rate ISA that has just matured.

• 27:33Martin Lewis?

  A fixed rate ISA. Can you remind me what a cash ISA is, please, Adrian?

• 27:38Speaker 05

  It's just a savings, it's just a savings account, you don't pay interest.

• 27:42Martin Lewis?

  You don't pay tax on it? Yeah, exactly. So if you want a fixed rate savings account that pays you interest each month, you could get a fixed rate ISA that pays you interest each month. That's it. So you could do, you don't have, it's not an either-or, it's do I want it in the ISA wrapper or not? Now, interestingly, we tend to find that the top paying easy access cash ISAs outpay the top paying normal savings. But the top paying normal fixed rate savings outpay the top fixed rate cash ISAs. And the reason for that is fixed rate cash ISAs have one advantage over fixed rate savings. A fixed rate cash ISA must by law allow you to withdraw your money. You don't have to hold it for the whole period, whereas fixed rate savings, they can lock

• 28:27Martin Lewis?

  your money away for two years or so. They can charge you a withdrawal penalty of saving 90 or 180 days' worth of interest. So if you're a non-taxpayer, you will earn more in a fixed rate normal savings accounts, because the rates are higher. If you're a taxpayer on your savings interest, the top fixed rate cash ISAs will outpay the top normal because of the tax advantage. Even if you're not a taxpayer, though, if you want that get out of jail free card that you could get your money out in an emergency, then that is an advantage of fixed rate cash ISAs over normal fixed rate savings.

• 28:57Speaker 05

  Jill, let's do one more.

• 28:58Martin Lewis?

  We'll do one more. And just to say to everyone, after this, we're going to be coming to the lifetime ISA, the first time buyer ISA, and the help to buy ISA, so yeah.

• 29:06Speaker 05

  Okay. Just, Terry, what gap between interest rates on cash fixed rate ISAs, is it worth paying the penalty and transferring to a higher rate one?

• 29:15Martin Lewis?

  Okay.

• 29:16Speaker 05

  She said she wants one of your lovely charts.

• 29:18Martin Lewis?

  All right.

• 29:19Speaker 05

  Helpful show, for example, 1%, 2%, 3% difference of penalties of 90, 180, 360.

• 29:23Martin Lewis?

  I can give you a rule of thumb.

• 29:24Speaker 05

  Okay.

• 29:25Martin Lewis?

  Okay. So, take your current rate and subtract the gap between your current rate and the best rate you can get, and that is how many times the length of the withdrawal penalty that you need to have left on your current ISA to make it worth going. Let me do it with an example, you're going to do the numbers for me, Adrian. So you have your money in a 3% fixed rate ISA, and you can get a 5% fixed rate ISA.

• 29:53Speaker 05

  So I've subtracted two from three.

• 29:55Martin Lewis?

  Right, which gives me one. Okay, so I have one. If the withdrawal penalty is 180 days, as long as I've got more than 180 days left, it's probably better to switch across.

• 30:08Speaker 05

  Okay.

• 30:09Martin Lewis?

  If the gap had been, if it had been 4% going to 6%, that would have been four.

• 30:15Speaker 05

  Minus two.

• 30:16Martin Lewis?

  Minus two, gives me two, and if the penalty was 180 days, I would need 360 days left for it to, or more, for it to be worth me ditching, paying the penalty and switching.

• 30:27Speaker 05

  Okay, got it.

• 30:28Martin Lewis?

  I think, I was doing that off the top of my head, I hope that works. Someone get in touch if I've just got my mouth.

• 30:32Speaker 05

  Will you do a lovely chart?

• 30:33Martin Lewis?

  Well, I don't need a chart, when I've got a rule of thumb. I mean, a rule of thumb trumps a chart.

• 30:37Speaker 05

  Terry wants a chart.

• 30:39Martin Lewis?

  I can't do a radio chart, how am I meant to do a radio chart?

• 30:42Speaker 05

  Put a chart somewhere else.

• 30:43Martin Lewis?

  Terry's happy with that answer.

• 30:44Speaker 05

  Okay, Terry, do let us know with your.

• 30:46Martin Lewis?

  Let me know whether I get a point for that, please, Terry.

• 30:52Speaker 05

  On lifetime ISAs then, and the first time buyer ISA, again, the basics and what happened in the budget, please, before we get to the questions.

• 31:00Martin Lewis?

  Okay, so these are the first time buyers products. You have the lifetime ISA, which is the current, the active product. It's openable for those aged 18 to 39. You can put up to £4,000 a year in and you get a £1,000 bonus. If you put £4,000 in, you get a 25% bonus of what you put in that can be used either towards a first time buyer property that costs under £450,000, or to hold until retirement age 60. So as sort of an alternative to saving in a pension, although we talk about how it compares later on. So that's the lifetime ISA. Now, the big change in the budget, I was delighted about because I've been campaigning on it for six years, and various chances have promised me they'd do it, and they haven't, but John Healy is doing it, and it's already happened,

• 31:45Martin Lewis?

  it's already in place. The big problem with the lifetime ISA, which I think has been incredibly detrimental, is if you withdraw money for any other reason than buying a first time property, or you're once you're aged 60, you have to pay a penalty. The penalty is 25%, but you just need to think about this for a second. You put money in, you get a 25% bonus, then you lose a 25% penalty. The net loss is 6.25%. So in other words, you've got 10 grand saved in it, you will have to pay the state a £625 to get your money out. My big issue hasn't been the penalty in itself, because that was done to deter people using it as a general savings vehicle, when it's a specific purpose savings vehicle.

• 32:26Martin Lewis?

  My problem has been that the LISA was set up with a property limit of £450,000. In 2017, house prices have gone up, that limit hasn't gone up. Young people, especially in the South East of England, who've been using it to save for a first time property, priced out of the market, they're buying a property at, say, £470,000, and they have to pay the state a fine to get their money out to use as deposit when they saved in a vehicle they were encouraged to save in as a first time deposit. What's happened in the budget is the penalty specifically if you're buying a property over £450,000 has been reduced to 20%. That's what I was arguing for, so I'm pleased with it. Now, what that actually means is 25% on the way in and 20% on the way out. You get back what

• 33:09Martin Lewis?

  you put in, plus the interest you've earned roughly, but you don't get the bonus. But there's no fine anymore. So that means, I used to say on lifetime ISAs, they are a great way to save as long as you're definitely going to buy a property under £450,000. I can now say they are a great way to save as long as you're definitely going to buy a property. Because if you buy a property, you're either going to get the 25% bonus, or if you don't get the 25% bonus, you're going to get the equivalent of a cash ISA with interest, you're just not going to get the bonus. So you may as well use it rather than the cash ISA with the cross your fingers that you might be able to buy a property under £450,000. At the same time that they've done that, it's been confirmed that the first time buyer ISA will launch in April 2029, and at that point, the lifetime ISA will

• 33:53Martin Lewis?

  close to new openers. So if you've got it, you can continue to use it in exactly the same way. But if you haven't opened one by that point, first time buyer ISA, relatively similar, except it doesn't have the retirement age, it's just for first time buyers. The big change is there's no age limit. So as long as you're aged 18, if you're 74, if you've not bought a house or owned a house anywhere in the world before, you can use the first time buyer ISA if you chose to. It's still £4,000 a year, and 25% added on top. Slightly different structure, lifetime ISA adds the bonus as soon as you put the money in. First time buyer ISA will add the bonus before exchange as you get the money, but it will add it on top of what you've put in, plus the interest. So the massive, it's relatively similar, the way it works. You're still going to get the bonus on it.

• 34:37Martin Lewis?

  And crucially, you can withdraw your money anytime without a penalty on this. So because the bonus hasn't been added, you can lose it like a normal savings account. If you choose to, you can take the money out whenever you want to take the money out. And obviously, their ISA, so they're tax free, and they're in that wrapper. Take the money out whenever you want to, and you just, you won't lose anything, because the bonus is only added when you actually use it as a first time buyer. So that's in a nutshell what's happening.

• 35:01Speaker 05

  Okay. Josh, I have money in a, I can never know if it's LISA or ISA.

• 35:06Martin Lewis?

  LISA.

• 35:07Speaker 05

  Unable to use when buying a house two years ago, due to the cap on the value of the property you could buy. I've been waiting for reform to allow me to extract cash at 20%, not penalized at 25%, if house bought is more than the cap. Does the new reform allows this, or is it only activity from the 29th of October onwards?

• 35:26Martin Lewis?

  I'm so sorry, Josh. It changed on last Thursday, and the way that it works, the way that you get the lower penalty for withdrawal is you do it via your convincing solicitor when you're buying a property. The same way that you get the bonus is via your convincing solicitor when you're buying a property. So you've already bought a house. Your choices are withdraw the money with the 25% penalty, so the effective 6.25% fine, or keep it in there until you're aged 60. I'm so sorry.

• 35:55Speaker 05

  Rebecca, my 18-year-old son's just started a finance apprenticeship. Should he start a LISA immediately, or wait for the changes to come in?

• 36:02Martin Lewis?

  Immediately.

• 36:03Speaker 05

  Okay.

• 36:03Martin Lewis?

  Now, have you done it, Rebecca? Have you done it?

• 36:05Speaker 05

  Rebecca, do it now.

• 36:07Martin Lewis?

  Here is why, but I'm only saying a quid. And I've said this before, but I'm saying it even stronger and even louder now.

• 36:15Speaker 05

  And accompany it with a...

• 36:16Martin Lewis?

  No, I was expecting more reverb.

• 36:19Speaker 05

  Right, okay.

• 36:19Martin Lewis?

  I mean...

• 36:20Speaker 05

  Don't do any hard, raw, your damage.

• 36:21Martin Lewis?

  I hit the mic, no. So here's what you need to understand. If you are aged 18 to 39, whether you have bought a property or not, I want you to have a pound in a lifetime ISA. Because we now know the lifetime ISA will close in April 2029, to new openers, that's terrible phrasing, I can't think of a neat way to say it, but it will still remain open. So you want to make sure you have the facility of a lifetime ISA. Putting a pound in one does two things. First, to use the lifetime ISA to get the bonus on your first time buyer property, you have to have had the lifetime ISA for a year. Same's going to be true with the first time buyer ISA as well, you will need to have had it

• 37:02Martin Lewis?

  for a year. Which interesting means, if you're buying a property before April 2030, because the first time buyer ISA starts in April 2029, then lifetime ISA is for you, not first time buyer ISA, because you won't be able to get the bonus on the first time buyer ISA, the earliest will be the 6th of April 2030, and you'd have had to open it exactly a year before, it's on the first day. So putting a pound in a lifetime ISA, first of all, gets that, that clock is ticking. It means when you want to put money in, if it's been open a year, even if you've only got a quid in, you suddenly dunk four grand in, then you can get the bonus the next day and buy a property a month later, or whenever. So you can activate it more quickly. But also, while I am generally not a fan of the retirement savings element of a lifetime ISA for most people, if you've got a pension through your employer, that will beat it. If you're self-employed at 40% tax, that

• 37:47Martin Lewis?

  will generally beat it. If you're self-employed, basic rate taxpayer, you know, there are pros and cons, and I actually did in the Question Time podcast, you can listen back to that we put out on Monday, I went through the pros and cons of the differences between those two. But there are pros and cons, but none of that's the point. My point is, if you've got a lifetime ISA, and in 2042, even though it closes to new openers in 2029, in 2042, you are suddenly in the situation where you go, do you know what, this is actually better than the pension for me, looking at the 25% I get added on top, I'd prefer to use this for retirement savings. You can, because you've opened it with a quid. So just to get, I'm going to make this even more, because this actually will get even

• 38:27Martin Lewis?

  bigger on this. Also, the new rules with the first time buyer ISA say, you can have a lifetime ISA, and a first time buyer ISA, and get the bonus on both when you buy a first time property. What you can't do is contribute to both in the same tax share, so you can't get two times a thousand pounds for in a year. So if you have the LISA now, even if the first time buyer ISA becomes better for you once it comes into play, your savings in the meantime won't be lost if you're buying a first time property. So for all of those reasons, do not wait. Start your lifetime ISA now. How much money you should be putting in it depends on whether you are definitely going to buy, or your son, it is, isn't it, is definitely going to be buying a property at some point. But

• 39:08Martin Lewis?

  I think for an 18th birthday present until April 2029, an 18th birthday present would be great, is a pound coin with a list of the top lifetime ISA provider in there at the time, and a note, and say, please go and put this pound in a lifetime ISA, and you'll be starting an 18-year-old well by giving them a facility that's going to disappear in a couple of years.

• 39:29Speaker 05

  Sharon, please, can you mention the Help to Buy ISA? My son's is frozen, I thought she said my son is frozen. My son's, apostrophe S, is frozen, and it would appear a useless product. Is he best moving to a normal ISA, as I'm not aware that the purchase prices have changed, etc. Any advice really appreciated.

• 39:46Martin Lewis?

  So, we've got the lifetime ISA, and we've got the first time buyer ISA, the predecessor to the lifetime ISA, that's now three different first time buyer ISAs, right? The predecessor is the Help to Buy ISA, which was replaced by the lifetime ISA. The Help to Buy ISA, in many ways, is quite similar to the new first time buyer ISA, it's not got the retirement element. The issue with the Help to Buy ISA is you have to be buying a property under £250,000 outside of London, and under £450,000 inside of London. You can transfer it into a lifetime ISA, but only up to four grand, because that's the lifetime ISA annual limit. You will be able to transfer all of it, we believe, I need to double check that, into a first time buyer ISA once that opens. I need to check whether that's the limit per

• 40:29Martin Lewis?

  year, the £4,000 a year, or there'll be a special exemption. Hopefully, I might have that, I'll do that in the podcast, I'll cover it in the podcast. So through the magic of podcasting, I have done a check. You will be able to transfer the full amount in your Help to Buy ISA into a first time buyer ISA, once that starts in April 2029. Though remember, you won't be able to use it to a first time property until April 2030, because it has to be opened a year before you can use it. That also, interestingly, would not use up that year's first time buyer ISA allowance. Giving you an example, you've got £7,000 in your Help to Buy ISA, you transfer that into the first time buyer ISA that year, you will still be able to contribute £4,000 to your first

• 41:14Martin Lewis?

  time buyer ISA in that year, because you can move the whole allowance, and it doesn't count towards that year's allowance. So that is that cleared up. Done. Back to the pod.

• 41:25Martin Lewis?

  Anyway, so the point is, like the first time buyer ISA, the Help to Buy ISA doesn't have a penalty. So you can withdraw money whenever you want. I would probably keep it in there in case you decide to buy a property, or in case you're holding and you're able to move it into the first time buyer ISA once you get there. You're only sacrificing a couple of percentage points of interest rate compared to the best normal savings out there, but you've got the facility. And with the Help to Buy ISA, you have to put in money each month, so it takes you quite a long time to build a reasonable amount in there. Unless it's under four grand and you're going to be buying the property under £450,000, in which case I'd put it into the lifetime ISA. The lifetime ISA is a much better product than the Help to Buy ISA for most first time buyers, but it's not as flexible because of the penalty.

• 42:10Martin Lewis?

  So you only want it in there if you're definitely going to be buying a property. I hope that's answered it. And you've sent a lot of first time buyer and ISA and Help to Buy ISA questions in, so I'm going to do more of them in the pod only bit. Keep listening for that. Now, Mastermind. Welcome to Money Mastermind. Adrian, you've got 26 right and 44 wrong in this three option multiple choice quiz, which means hurrah, you are

• 42:39Speaker 06

  BRC.

• 42:44Martin Lewis?

  Better than random chance. Adrian, that is a staggering run of four correct in a row. It is unprecedented. And that news has sent shockwaves throughout Westminster. Earlier this week, in an unprecedented secret summit, Mrs Burnham, Davy, Farage and Polanski and Ms Badenoch met in the secret dungeon, secret basement of the House of Commons, and for the first time in history, they agreed on something. Charles must be Chancellor. The response from former Chancellors was swift. Quatang sent a hard hat. Hunt sent a U-turn sign. Reeves sent a fiscal rule. And Healy, who's only had the job since July, sent a removal van.

• 43:28Martin Lewis?

  All with one message, let's see how you like it. But protocol demands that you prove yourself, Adrian. All you have to do is show you understand the new state pension tax allowance.

• 43:40Speaker 05

  No, no trouble.

• 43:41Martin Lewis?

  Starting April 2027. So here you go.

• 43:45Speaker 05

  Easy, easy.

• 43:46Martin Lewis?

  But they're so desperate for you to have the job, they're even letting me give you a clue.

• 43:50Speaker 05

  Right.

• 43:51Martin Lewis?

  The normal personal allowance stays frozen at £12,570 from next April. But rule one of the new pension tax allowance that's coming in next April is that anyone of state pension age can have up to £13,037 a year of taxable income, tax free. So Chancellor, it didn't work. Chancellor, Chancellor, it didn't work. Yeah, you see what I'm doing, it didn't go that well. A state pension has £30 a year more taxable income, so they earn £13,067. How much tax will they pay the tax starting next April? A, £6? B, £16?

• 44:35Martin Lewis?

  Or C, £100?

• 44:37Speaker 05

  Right, so, okay, so the £12,570 stays there.

• 44:43Martin Lewis?

  That's the standard personal tax allowance for everybody.

• 44:45Speaker 05

  Yeah.

• 44:46Martin Lewis?

  Then there's a special pension tax allowance.

• 44:48Speaker 05

  Yeah.

• 44:49Martin Lewis?

  Which says nobody who earns, if you are of state pension age, regardless of your income sources, your taxable income can be up to £13,037 a year, and you won't pay to any tax.

• 45:00Speaker 05

  Right.

• 45:01Martin Lewis?

  The question is, for somebody who earns £30 a year more, how much tax would they pay? £6? £16? Or £100? And each of those numbers has a reason, I should tell you.

• 45:15Speaker 05

  So there's an extra £30?

• 45:18Martin Lewis?

  Yeah, and they are a basic rate taxpayer.

• 45:21Speaker 05

  Okay, and the 30, so there's an extra...

• 45:24Martin Lewis?

  They're of state pension.

• 45:25Speaker 05

  We're talking about the tax on the £30?

• 45:26Martin Lewis?

  No, we're talking about the tax that they pay in total.

• 45:29Speaker 05

  Yes, yes, but the tax...

• 45:31Martin Lewis?

  We're talking about the tax caused due to the £30.

• 45:33Speaker 05

  Yes, exactly. And what were the options again?

• 45:35Martin Lewis?

  £6?

• 45:36Speaker 05

  Yeah.

• 45:37Martin Lewis?

  How does 6 relate to 30?

• 45:38Speaker 05

  Um, well, not very... Well, yeah, it's 20%, yeah.

• 45:43Martin Lewis?

  How does 16 relate to 30?

• 45:45Speaker 05

  Well, it's, it's, 16 is just over 50%.

• 45:51Martin Lewis?

  And how does, how do you think the £100 relates to this? All of them have a reason.

• 45:55Speaker 05

  I've no idea how the £100 relates. How can extra £30 generate £100 of tax? So for this purpose, I can ignore the £12,570, that's...

• 46:09Martin Lewis?

  Absolutely not, no. £12,570 is the personal allowance. I think you need to just have a stab in the dark.

• 46:16Speaker 05

  Well, that could imply that you can add those two up.

• 46:18Martin Lewis?

  Well, what's 12,000, if, just to say, you asked what the £100 is.

• 46:22Speaker 05

  Yeah.

• 46:23Martin Lewis?

  What's, um, what's £13,067 minus £12,570 roughly? It's about £500 more. And what's 20% of 500 as a basic rate taxpayer?

• 46:33Speaker 05

  100.

• 46:34Martin Lewis?

  So that's what option C, how option C is derived. So you've got A is £6, B is £16, and C is £100.

• 46:41Speaker 05

  Right, I said, I don't... So, hang on. Sorry, I know we haven't got time for this.

• 46:49Martin Lewis?

  No, no, but I want to go through this.

• 46:51Speaker 05

  Okay, so you've got two different answers. You can't add those two allowances together.

• 46:56Martin Lewis?

  Well, that's part of the question. Give me an answer because I want to explain it. Go on.

• 47:00Speaker 05

  Um, oh God, that kind of makes sense. Um, I, I...

• 47:08Martin Lewis?

  I just say the rest of the pensioners out there doing exactly the same as you right now.

• 47:13Speaker 05

  I don't know really what you're on about. I'm going to go for £100. It's so unlikely.

• 47:17Martin Lewis?

  You're going for C, £100.

• 47:18Speaker 05

  Yeah, I haven't got a clue why.

• 47:20Martin Lewis?

  So, if the state pension, if you simply said that state pensioners have a new personal tax allowance and that's £13,037, A would have been correct because it's £30 above that, you'd pay 20% on it, that's six quid. If what they've said is, you get, as long as your earnings are under £13,037, that's, you can earn that tax free, but you earn any more, you just get the normal personal tax allowance, which was a worry that was going to happen in the budget, because that was effectively sort of how Rachel Reeves had indicated it last year, then it would have been C, and you would have paid £100.

• 47:55Speaker 05

  Right, I see now, yeah.

• 47:56Martin Lewis?

  Thankfully, that is incorrect. Uh-uh. The correct answer is the one that doesn't bear any logic, you would think, which is B. So here is the rule. I'm going to take this slowly because this is really important. Rule number one, if you earn a total of under £13,037, you know, I don't care if you get the winter fuel payment, I don't care if you're on the old state pension, it's the amount you earn of taxable income that counts. You do not pay tax if you're of state pension age.

• 48:24Speaker 05

  Right.

• 48:25Martin Lewis?

  That's the rule. Rule number two, for every £3 you earn over

• 48:33Speaker 05

  Over.

• 48:34Martin Lewis?

  That amount.

• 48:35Speaker 05

  Yeah.

• 48:36Martin Lewis?

  You lose one pound of your pension tax allowance. Now, at £13,037, your pension tax allowance, is it saving you £94 that you would have paid if you were 62? You'd be paying £94 tax on £13,037. So your pension tax allowance is worth 94 quid. You lose a pound of that for each £3 you go over £13,037. So if you earn £30 more.

• 49:05Speaker 05

  Yeah.

• 49:06Martin Lewis?

  Right? You, first of all, because of the £30, you would pay six quid of that.

• 49:13Speaker 05

  Yes.

• 49:14Martin Lewis?

  Right? You would also lose £10 of your pension tax allowance, so that would be worth £84, not £94. So you pay £10 extra tax because you've lost the pension tax allowance.

• 49:29Speaker 05

  Yeah.

• 49:30Martin Lewis?

  And £6 extra tax because you're earning 30 more.

• 49:33Speaker 05

  Ergo.

• 49:34Martin Lewis?

  So the correct answer is 16. Now, the most, it's incredibly complex.

• 49:38Speaker 05

  But why is it framed like that? There must be a good reason.

• 49:40Martin Lewis?

  Because Rachel Reeves said, when I asked her this question, and I wasn't expecting the answer in the budget last year, she said, nobody earns over the full new state pension will pay tax on it. And I was like, sorry, because I was asking whether they'd have to fill in a form, and she said, I said, they won't pay tax, they won't pay tax. And then since I've been lobbying, as have other people, well, hold on, what if you have £30 more, are you suddenly going to have to pay £100 tax on your £30, which means your private pension wouldn't pay? So they had to come up with some form of solution that says, if you earn more, you'll still get more, but we don't want to give every state pensioner a £13,037 tax allowance, because then the under 65s would say, hold on, this is outrageous, why did they get more? So then they claw it back. Now, the best way to think about it, I've done the maths of how it works, which is really complex.

• 50:24Martin Lewis?

  This is what I'd say. If you earn £13,037 or more and you're of state pension age, even if you've deferred your pension, if you're of state pension age, you won't pay tax. If you earn £13,319 or more, you will pay tax just like everybody under 65. You basically, you have what you earn, you subtract £12,570 from it, and as long as you're in the basic rate taxpayer, you pay 20% of that. If you're in this very small bracket between £13,037 and £13,319, you will pay some tax, but less tax than you would have done if you were under 65.

• 51:06Speaker 05

  Right.

• 51:07Martin Lewis?

  I mean, I could, again, the equation, if I just give you another example just to try and help you. You earn £13,136.

• 51:14Martin Lewis?

  That if you were under 65, you'd pay tax of £113.

• 51:18Speaker 05

  Why have you chosen that one? Because that's ninety-nine.

• 51:21Martin Lewis?

  Because it's ninety-nine and there's a three division in. That's why I chose that.

• 51:23Speaker 05

  Yeah.

• 51:24Martin Lewis?

  Right. So you'd pay £113 if you were under 65. Your pension tax allowance, the full one is ninety-four. You're ninety-nine pounds above, divide that by three, that's thirty-three. We take thirty-three off that. Your pension tax allowance is sixty-one, therefore ninety-four minus thirty-three is sixty-one. You would have paid £113. We take sixty-one, which is your pension tax allowance off. That's the extra allowance you're getting because you're a state pension age. And that leaves you paying tax at fifty-two quid. But it's worth noting, you've got ninety-nine pounds more income. You're paying fifty-two quid more tax. In the thirty-pound example, thirty pounds more income, sixteen pounds more tax. It's actually a relatively effective, high marginal rate between that bracket of just over fifty percent

• 52:05Martin Lewis?

  of the extra income you get goes to pay tax because they're on a catch-up until you get to thirteen thousand, three hundred and nineteen. I hope that explains it for people. If you don't understand, just remember, you don't pay any tax under thirteen thousand and thirty-seven. You pay the same tax as everybody else above thirteen thousand, three hundred and nineteen pounds. And you get a little bit of a tax advantage if you're somewhere in between compared to everyone else. You've got a question, I think, on state pensions somewhere. We'll do that.

• 52:28Speaker 05

  Please expect maths on tax for people with only state pension but earning tiny amounts. Still up top up my income with work. Why hasn't the individual income tax allowance been raised for five years? Cruel and nonsensical.

• 52:39Martin Lewis?

  The reason they haven't raised it is dead simple. It would have cost more money and he didn't want to spend that amount of money. And he didn't want to give state pensioners a special allowance because of the intergenerational argument, this is my interpretation, not what he's told me, of the intergenerational arguments that are out there. So he had to find as neat a solution as he possibly could to allowing people who got the full new state pension not to pay tax and then have a slight carve-out out which was, but leave most state pensioners who have bigger incomes, let's say you've got a big private pension, paying the same tax as somebody who's aged under sixty-five.

• 53:09Martin Lewis?

  Hello, welcome to the pod-only section now. PPS podcast producer Simon is joining me. Suitable for PPS to be at the end of the pod. It sort of makes logical sense.

• 53:19Speaker 07

  There's so many, so many hidden layers to that name, wasn't there?

• 53:22Martin Lewis?

  Absolutely. It was almost like I designed it, but I didn't really. It was purely by accident, to be fair. It's just an acronym. Adrian got it wrong. I was sort of expecting that this week because this pension tax allowance is so complicated. I know we've got other questions on it. I'm keen to get through them. Why don't we go straight into those before we get on to more of the lifetime ISAT-type questions?

• 53:41Speaker 07

  Yeah, so the first question we've got is from The Crofter. How will the existing marriage allowance be affected due to the state pension tax allowance?

• 53:49Martin Lewis?

  So the basic answer is it won't be. The marriage tax allowance allows a non-taxpayer to shift 10% of their personal allowance, the twelve thousand, five hundred and seventy pounds a year, to their taxpaying partner as long as their partner is a basic rate taxpayer. They've already said that those rules still apply in the same way. So you can't be shifting your pension tax allowance. You've just got to be looking at the, the non-taxpayer who's earning under twelve thousand, five hundred and seventy pounds for that one to work.

• 54:16Speaker 07

  And Irene says, do you think we could legally challenge the new biased state pension rules?

• 54:22Martin Lewis?

  The interesting thing when you ask that question is I don't know which particular bias you are talking about. You might be saying because it's unfair, because I'm under sixty-five and therefore state pensioners get a bigger tax allowance than I do. In which case, no, you can't challenge that, I wouldn't have thought, but you would have to ask a lawyer. I mean, we have seen age discrimination in the tax system before. There's already existing age discrimination in the tax system for married couples over a certain age get a different allowance. So I think that is unlikely. You might be saying, and I've read this bias as well, some people saying, this is very unfair for people who get the old state pension plus SERPs where they're getting, earning more than thirteen thousand and thirty-seven pounds and they're having to pay tax on it. Again, I think, I'm not making a moral call and you would need a lawyer.

• 55:07Martin Lewis?

  I'm a money-saving expert, not a lawyer. But I think it would be a tough challenge because what this rule says is this is not about which state pension you're on. And if you want me to be really technical, it doesn't even align to the full new state pension. The full new state pension is thirteen thousand and thirty-six pounds and forty pence. So you would round that down to thirteen thousand and thirty-six quid. This allowance says you don't pay tax up to thirteen thousand and thirty-seven pounds. Yes, I know it's only sixty p difference, but, but it is, I think, quite deliberate that it doesn't align up. They've just rounded it up. And they have said, this is any income, whichever pension you're on.

• 55:48Martin Lewis?

  So what they've effectively done is started a new pension tax allowance with a figure of thirteen thousand and thirty-seven that happens to be very close to the full new state pension, but isn't the full new state pension, which applies whether you're on the old state pension, the new state pension, as long as you're a state pension age. So if your argument is this is unfair to people on the old state pension who are getting SERPs because they're paying tax, well, the new state pension tax allowance doesn't actually do that. It just gives you an extra tax allowance if you're of a certain age that goes through a taper system that's taken off. So I would think it would be very difficult to argue that because you're getting the same tax treatment if you're on the old state pension as somebody who is on the new state pension.

• 56:30Martin Lewis?

  It's just the amount that doesn't link up, but there's no rule that the amount does have to link up. So that someone might do a legal challenge on it. There might be a group case, that's, that's not. But I think in terms of what you're arguing, I suspect it would be tough, but ask a lawyer that one.

• 56:45Speaker 07

  And our final question on this one comes from Jane. What impact, if any, does the new state pension tax allowance have on the one thousand pound basic rate taxpayer interest on savings and the five thousand pounds starting rate for savings, please? Not that I have enough savings to worry about it, though.

• 57:01Martin Lewis?

  Well, if you're, both of those are tax-free allowances. And if you're a basic rate taxpayer, you get that thousand pounds. So you would get that anyway. And I'm not quite, I can't really think how it would impact it. It wouldn't, as long as you don't pay higher rate tax, you get a thousand pound personal savings allowance, the amount of interest you can earn tax-free each year. The starting savings rate still starts at twelve thousand, five hundred and seventy. There is no change to that. The pension tax allowance is separate. So trying to think if there'd be any way they interact. I will have to double-check that, but my instinct is it doesn't really change much and wouldn't really come into effect because it's only on people on that very narrow income band of, you know, up to thirteen thousand, three hundred and nineteen pounds, whereas the starting savings rate effectively goes up to income of eighteen thousand, five hundred and seventy pounds. So you would still get it.

• 57:46Martin Lewis?

  First thought, and I hadn't thought about it before, is no impact. We'll do a little bit of digging on that. I will bring it you back if there is any impact. I won't bother to bring it you back if there isn't. And I think that's where we'll end the state pension. I hope people understood it. And don't blame me for the complexity. Hopefully, my little rule of thumb of, you know, that under thirteen thousand and thirty-seven pounds, no tax. Above thirteen thousand, three hundred and nineteen pounds, you pay tax like everybody else. And somewhere in between, you get a slight tax advantage compared to the under sixty-fives. That's the easiest way to think about it.

• 58:21Martin Lewis?

  Right, Simon, we have had so many questions on the various, I'm going to call them first-time buyers ISAs, which is not the first-time buyer ISA, it's the first-time buyer ISA, the lifetime ISA, the Help to Buy ISA. So let's try and bash through a few more of those because I really want to get people's questions answered.

• 58:35Speaker 07

  Yeah, it did strike me that these are products that are aimed at a generation that are also working through a lot of different plans for their student loans.

• 58:42Martin Lewis?

  Yeah, there are five different student loan plans, plus, suppose graduate plan. I mean, at least these have different names.

• 58:47Speaker 07

  Yes.

• 58:47Martin Lewis?

  But yeah, it is complicated because people get confused between the terms. We have the question about the Help to Buy ISA and people worry about taking the money out of the Help to Buy ISA because they've heard of the lifetime ISA penalty, even though there isn't a Help to Buy ISA penalty. Anyway, let's try and clear them up. Who've you got for me?

• 59:01Speaker 07

  So Charlie, I have a LISA and I will be a first-time buyer. My husband has been a homeowner in the past. Can I still use my LISA towards a joint house purchase?

• 59:11Martin Lewis?

  Going to put you on the spot, Simon. What does the I in ISA stand for?

• 59:15Speaker 07

  Oh, I think individual.

• 59:17Martin Lewis?

  See, you should do mastermind, not individual. Individual. So it is an individual savings account, not a joint savings account. You can't have a joint ISA. And that means the rule applies to you. So if you are a first-time buyer, which is defined of never having owned or part-owned a property anywhere in the world before, even if you're buying with someone who isn't a first-time buyer, you could have a lifetime ISA and you can get the bonus. If you were buying with somebody who was also a first-time buyer, you could both have a lifetime ISA and you could both get the bonus. So Charlie, yes, a LISA works for you as a first-time buyer, regardless of the fact that your husband has owned a home in the past. He can't have one, though, for, as a first-time buyer, he could have it for retirement savings.

• 59:57Speaker 07

  Kevin wants to know, my daughter is 18 in February and has savings. She lives at home with us. Which is the best ISA for her to open?

• 1:00:06Martin Lewis?

  If she is definitely going to be buying a first time property at some point, I would be putting money into a lifetime ISA. And as you heard earlier in the pod, the risks of doing that are now diminished because there's no penalty if you're definitely buying a house. You might not get the bonus, but you won't pay a penalty. And you can't open a Help to Buy ISA and you can't open a first time buyer ISA. If she isn't going to be buying a house, then you would want to look at a cash or a shares ISA. I say that because a lifetime ISA can be in cash or in shares. So a lifetime ISA covers both, but you want to look at a cash or a shares ISA. If you're putting money away for the long term that she won't use, I think she should be looking at a shares ISA. If it's the short term rainy day type fund, just to have money done something she's going to be

• 1:00:49Martin Lewis?

  spending in the next few years, then you'd want to probably keep it in the cash version.

• 1:00:53Speaker 07

  Karen's next up. For people in their 40s with a LISA for retirement, are there many options for moving to a new provider as we are unable to open a brand new one past the age of 39? Can we move between stocks and shares and cash LIsas now? Will competitive rates continue to be offered once they're scrapped for the new Help to Buy ISA?

• 1:01:12Martin Lewis?

  So yes, even though you are over 40 and you're joining the likes of grey hairs like me, sorry about that, Karen, you are able to open a LISA with a new provider, but you would have to transfer your existing lifetime ISA over to it. And then you would be able to contribute because you can contribute up to the age of 50 and still get the bonuses. I do believe most LISA providers allow the over 40s to transfer. And generally, the rule is if they allow transfers, they allow the over 40s to transfer. So yes, everything that you're asking, you can do. Your final bit of your question, will competitive rates continue to be offered once they're scrapped for the new Help to Buy ISA or first time buyer ISA is actually the technical name of the new one? I think they will be less competitive, but they may well still be decent.

• 1:01:56Martin Lewis?

  Help to Buy ISA rates have dropped. They're not as good as lifetime ISA rates. And so we can look at that as a, as a proxy. Help to Buy ISA is a predecessor to the LISA. You're asking about the LISA, which will be the predecessor for the first time buyer ISA once it starts in April 2029. I think rates will not be as good, but they'll still be all right. And when you consider the 25% bonus that you're eligible for, when you factor that in, it would still be worth doing if you're going to be buying a first time property.

• 1:02:21Speaker 07

  Donna wants to know, if I have a LISA already and prefer the new first time ISA, can I open the new one and use both when the time comes to buy a house?

• 1:02:30Martin Lewis?

  Yes, absolutely. The only thing you won't be able to do is get the bonus on both. So after April 2029, if you have a first time buyer ISA and a lifetime ISA, you will be able to contribute £4,000 a year to one of them. You can choose which one you contribute to, but you can't contribute to both. Because otherwise you'd be able to work it so that you got a £1,000 bonus from the first time buyer ISA and a £1,000 bonus from the lifetime ISA. And they're not allowing that. But if you have both and you've got money in both, when you buy a first time property, you will be able to get the bonus on both.

• 1:03:03Speaker 07

  Obsidyak?

• 1:03:05Martin Lewis?

  Don't ask me.

• 1:03:07Speaker 07

  Obsidyak.

• 1:03:08Martin Lewis?

  How's it spelt?

• 1:03:09Speaker 07

  O B S Y D I A K.

• 1:03:12Martin Lewis?

  Obsidyak. And we would like to apologise to you that we don't know how to say that name. And we hope we haven't done it a terrible disservice.

• 1:03:18Speaker 07

  Well, we hope you are at least pleased with the answer to your question, which is, will the government exempt those on benefits from having first time buyer slash LIsas from counting as savings slash income for the purpose of the cut off? If we use it, we have payment cuts. We can't reliably access this money.

• 1:03:35Martin Lewis?

  So this is effectively that if you've got savings and you're on universal credit, if you've got £6,000 in savings or more, the amount you're entitled to diminishes until you've got £16,000 where you don't get any universal credit. So effectively having savings diminishes your ability to get benefits. The lifetime ISA absolutely counts as savings and I would presume the first time buyer ISA will because all other Isas do count. Interestingly, and we talked before in brief about pension versus lifetime ISA, one of the advantages of saving in a pension for retirement over saving in a lifetime ISA as retirement is money inside a pension does not count as savings towards your universal credit entitlement. But I'm afraid I don't think there will be any change on that. I will do a double check and come back to you if it's different. Remember, it's not starting till April 2029.

• 1:04:20Martin Lewis?

  So having the exact details now isn't absolutely crucial. It's more about you understanding the new product in relation to a lifetime ISA now.

• 1:04:27Speaker 07

  Jason is asking, will the government continue to contribute up to £1,000 a year to LIsas once the new Help to Buy ISA comes out?

• 1:04:34Martin Lewis?

  And again, just to correct, it's the new first time buyer ISA. The Help to Buy ISA is the predecessor, but I understand why you put that. As far as we know, the government has committed to doing so. The lifetime ISA should pay out a bonus up until the age of 50. So you get the bonus up until the age of 50, so a maximum possible 32 years if you opened it at 18. So arguably, doing the maths on the top of my head, if you opened it on the 5th of April 2029 and you were aged 18, that would take us to 2061. The last lifetime ISA bonus would be paid at some point in 2061, as far as we know. And they tend to work that way on these legacy products. They keep them open.

• 1:05:18Martin Lewis?

  What the rates will be like then and whether it's still competitive or not is another question. Remember though, you can invest inside a lifetime ISA. And so for those using it for retirement savings, I would expect it to probably be more competitive for investment at that point than cash at that point. Because most people who've got it at that point won't be using it as a first time buyer. And therefore they'll probably have it in investments and there'll be that investment. And you haven't got the alternative for that.

• 1:05:39Speaker 07

  And the great honour of the final question on this topic goes to Pat.

• 1:05:43Martin Lewis?

  Okay.

• 1:05:43Speaker 07

  Hi Martin.

• 1:05:44Martin Lewis?

  She gets a pat on the head, which you shouldn't get, it shouldn't get in a cow field. Carry on.

• 1:05:49Speaker 07

  Hi Martin. If I use the lifetime ISA as a retirement vehicle as opposed to for purchasing the house, what's the rules around? Can I only put £4,000 a year in until I turn 40? If not, until what age can I put money in and the government continues to top up? Thanks.

• 1:06:04Martin Lewis?

  I've just done it, haven't I Simon? So the answer is, were you listening?

• 1:06:07Speaker 07

  Yeah, you can carry on putting money in for ages.

• 1:06:09Martin Lewis?

  Until age 50.

• 1:06:11Speaker 07

  50, I was going to say 56.

• 1:06:12Martin Lewis?

  So the rules are you can open it at age 18 until the day before your 40th birthday. You can contribute and still get the bonus added up to age 50. And then you can take your money out without penalty for not buying a house once you are age 60. That is how it works. And I think this pod is all about the future of Isas. Hopefully we've talked about the past, the present and the future of Isas. This is our own A Christmas Tale, the ISA version, and I'm very proud to be the Scrooge.

• 1:06:50Martin Lewis?

  And that's it for this week. We tend to put out a new episode every Thursday and Monday, which is our Question Time podcast, where you can ask me absolutely anything and everything, open brackets, within reason. If you've enjoyed today's show, please tell your friends you've been listening to the Martin Lewis podcast. And why not subscribe and leave us a review? Then your pockets will be pleased with you and we will be too. And if you haven't enjoyed it and you've been listening this long and you chose to stay, even though you don't like it.

• 1:07:34Speaker 06

  Martin Lewis is the founder of MoneySavingExpert.com. But of course, other consumer and price comparison websites are available. You can get in touch with Martin's podcast production team by emailing [email protected]. The offers and rates mentioned in the podcast are correct at the time of recording. However, if you are listening on demand, it's worth double checking as details can date. Remember to subscribe on BBC Sounds and leave us a review however you listen.

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