United Kingdom

Unity Mutual touts a Lifetime Isa paying 1.50%, but is it really a best buy?

At a time when cash savings rates are low and potential investors may be scared off by market instability, anything that gives those saving for a home a consistent return and free government money is bound to turn heads.

Such is the case with a new offer from Unity Mutual, a society based in Manchester, which at first glance appears to be the fifth provider to offer a cash Lifetime Isa, available to the under 40s.

The 1.5 per cent rate would mean it would be the highest paying cash Lifetime Isa, beating app-based provider Moneybox, which currently offers 1.4 per cent.

Unity Mutual is a Manchester-based financial firm which offers a number of products. As well as the Lifetime Isa, it offers a stocks and shares Isa, and a five year fixed-rate investment bond

Indeed, the email sent to This is Money advertising the product describes it as a 'market-beating 1.5 per cent rate.'

That rate of return is as well as the 25 per cent government bonus paid on Lifetime Isa savings, which allows you to put away £4,000 each tax year towards your first home or retirement.

Were it a cash Lifetime Isa, it would be a fantastic offer and one we would include alongside Skipton, Nottingham and Newcastle building societies and Moneybox in This is Money's guide to the Lifetime Isa.

However, it is not, and that 1.5 per cent return comes with a rather large asterisk next to it.

This is because, contrary to the claims of a 'market-beating' rate, Unity Mutual's offer is a stocks and shares Lifetime Isa.

It is clear on this on its website, but it means any comparisons with rates offered by cash savings products aren't exactly apples to apples.

An email sent to This is Money advertised the new Lifetime Isa, clearly comparing the rate of 1.5% offered on it to cash savings Lifetime Isa products

Your next question then is likely to be how can a stocks and shares Isa offer a guaranteed rate of return and 100 per cent capital protection.

This is because not only is Unity Mutual's Lifetime Isa an investment product, it is also a life insurance product. 

This means 100 per cent of your investment with it protected by the Financial Services Compensation Scheme, unlike the maximum £85,000 held with banks, building societies or investment platforms covered by the deposit protection guarantee, but you may also receive a payout if you die.

If you contribute at least £1,000 a year for five years, then on the account holder's death a payout of the greater of £5,000 or 101 per cent of the value of your deposit will take place. 

The account can be opened with £1, but any further contributions must be at least £25.

When you dig into the terms and conditions, you find out the Lifetime Isa is invested in a 'Unity Mutual Property Saver Fund', and also comes with a payout in the event of death

What then, is your money invested in? According to the terms and conditions, 'the account will hold a Unity Mutual life policy, which invests in Unity Mutual Property Saver Fund.'

It does not give any indication as to what constituent parts make up the fund, be it bonds, cash or equities, but the key information document for the product labels it three out of seven on the risk indicator, suggesting a lower risk investment.

The mutual guarantees at the moment you will get back 1.5 per cent regardless of what the market conditions are, but does state in its terms and conditions that 'interest rates are set in March each year for the next tax year', and that they could change. 

Reasons for this include 'to enable us to respond to changes in the return on the underlying investments, either in relation to the past or expected future returns' and 'changes in the economic environment, including market volatility in bond, equity and property markets'.

The Lifetime Isa guarantees a 1.50% return rate regardless of what the market does, though in its terms and conditions the society says it can change the interest rate

It told This is Money that: 'The money is invested 100 per cent in our own property portfolio where we have a high degree of certainty of investment yield and can project with some certainty the annual net yield and, bearing in mind our financial strength, we can determine what sustainable return we can support.

'This is how we are able to guarantee our rate for a full tax year, unlike the cash providers who have the ability to change their rates with only 30 days' notice.' 

Regular readers of This is Money may remember a story we published back in June, where we were sent a supposed five year fixed-rate 2.85 per cent savings bond from Shepherds Friendly which turned out to be a life assurance product.

This savings bond, which claimed to have a guaranteed 2.85 per cent return whatever the circumstances, actually pooled savers money in a 'with profits' investment fund and invested 'in a mix of equities, government gilts, corporate bonds, property and cash'.

Back in June, This is Money was sent an email advertising a five year fixed-rate bond from Shepherds Friendly, which was actually a life assurance product

When asked how it could guarantee the rate of return, the mutual told This is Money: 'The society hold the investment risk of the funds invested not the customer. 

'We have used assumptions and calculations to determine the investment return that can be achieved over the period.'

In the case of this Lifetime Isa offering, it's unclear what role it actually fulfills. 

It's not a cash savings product which might put off some looking just to park their house savings in cash.

Meanwhile investors looking to build up a deposit for their home or retirement through the stock market, as already offered by the likes of AJ Bell, Hargreaves Lansdown and Nutmeg, would almost certainly be looking for an investment return of far greater than 1.5 per cent.

Unity Mutual added: 'As a mutual we cannot offer cash based savings products but we can offer a stocks and shares Lisa. 

'However, as we are protecting the savings there is no investment risk for the saver. 

'In other words, we are taking the investment risk rather than the saver. 

'Therefore, ours resembles a cash product in that the capital is protected and the return is guaranteed from one tax year to the next.'

How does a Lifetime Isa work? 

Introduced in April 2017, the Lifetime Isa was designed as a way to help people either save for retirement or get on the housing ladder.

It is available in either cash or stocks and shares form, but the underlying principle is the same; you can save up to £4,000 each tax year into one, and receive a 25 per cent government bonus on the amount stashed away.

However, unless you use the money for the purpose of either buying your first home up to £450,000, or withdraw it after the age of 60, you are hit with a 25 per cent withdrawal bonus, potentially leaving you with a real terms loss.

While the product has been criticised as gimmicky and hard to understand, there is a suggestion it has seen an uptick in use over the last year or so.

Only 166,000 people in the first tax year it was around opened one, but figures from Nottingham Building Society - the second provider to launch a cash version - in May found it was more than seven times more popular in than its forerunner in 2019, the Help to Buy Isa.

Meanwhile Skipton Building Society found 3,641 homes were bought with the product's help in 2018.

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