Martin Lewis says people born in these years can get free £1,000 a year

Money expert Martin Lewis says there's an account which will pay you a free £1,000 a year - but you could end up losing money if you don't use it for the right reasons. Those aged between 18 and 39, so born between 1986 and 2007, can open a Lifetime ISA with as little as £1. The LISA is a type of tax-free savings account which is topped up by the government with a 25% bonus to encourage people to save for a first-time buyer house to get on the property ladder, or to save for their old age.

Speaking on the latest episode of The Martin Lewis Podcast on BBC Sounds, Spotify and Apple Music released on July 3, Martin explained how the account will pay you a £1,000 a year bonus if you deposit the maximum £4,000 a year into it.

Martin Lewis said: "The basics of a LISA is if you are aged 18-39, you open a LISA, and you save in it up to £4,000 a year, and the state adds 25% on top that can be used either for a qualifying first house, which is basically any residential mortgage on a property that costs under £450,000, or you can wait to take it out once you're aged 60, so you can use it for its secondary purpose as retirement savings."

Martin Lewis reveals big problem with Lifetime ISA

Lewsis added: "Now on that basis, it's fantastic. Because you put £4,000 each tax year, and if you can max it out you get £1,000 free from the state."

But, you have to ensure that you use the money exactly within the rules - for example, if you open the account and start saving into it, you must buy a house worth less than £450,000 or you not only lose the bonus money, but you also get charged 6.25% extra. In short, you could actually end up with less money than you started with.

And in areas of England where house prices are very high, you could find yourself losing money on your purchase with a LISA if you're not able to stay under that limit.

Martin added: "The big question and the big problem with using it as a first time buyer is, what happens if it's not a qualifying house or you want to take the money out for another reason?"

Martin added: "There is a withdrawal penalty on the lifetime ISA that says if you take money you for any other reason than buying a qualifying house or until age 60, you pay a 25% penalty. So if you think about it, you get a 25% bonus but you pay a 25% penalty so intuitively many people think that means you get back what you put in, it doesn't.

"Let's imagine you have £1,000 in there, you get a 25% bonus, you've got £1,250. You have 25% now taken off £1,250, that's more than £250 because it's 25% of a bigger figure.

"The actual net result of this is if you take money out of a lifetime ISA for the wrong reason, you pay an effective penalty of 6.25%.

Warning for those in South East or London

"In other words, you save £10,000 in there hoping to buy a house, you're hoping you will get £12,500, because you want the bonus, but you end up not buying a qualifying house and you only get back £9,375 plus interest. So you actually get back less than you put in if you take it out for the wrong reason."

Martin added: "I don't have a problem with that because the lifetime ISA was set up for specific reasons, either saving for your older age or saving to be a first time buyer. The issue for me is for those people who are priced out, so have gone into an area where they've started saving for a LISA, certainly in the South East or London especially, but as a first time buyer the only property they are going to be able to buy is above £450,000. So they are using the LISA for what the state intended them to use it for...but because that property is over the threshold they have to pay a penalty. And not only lose the bonus but pay a fine to the state to get their money out."

The Martin Lewis Podcast from July 3 is still available to listen to via Spotify, BBC Sounds or Apple Music.