Help to Buy ISA vs. Lifetime ISA

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When Help to Buy ISA’s launched in December 2015, they were viewed as a great new mechanism to aid first-time buyers in boosting their deposit. However, when the new Lifetime ISA, which will launch in April 2017, was announced in the recent budget, people questioned the need for the Help to Buy ISA to remain.

Whilst the two options have many similarities, there are some differences between them. Here we outline the key fundamentals of both to help you to decide which one is right for you.

Help to Buy ISA

The Help to Buy ISA allows you to make a maximum contribution of £200 per month, plus a one off deposit of £1,000 when the account is opened that won’t count towards your monthly allowance. The government then adds a 25% bonus, up to a total limit of £3,000, which is paid when you withdraw the money to purchase a property. You have to be a first-time buyer, a UK resident and aged 16 or over to qualify and the property value must not exceed £250,000 (or £450,000 in London).

Help to Buy ISAs are limited to one person, which means both people in a couple can have one and benefit from the bonus. They can be opened until 30 November 2019 and contributed to until 2029. There is no penalty for making a partial withdrawal prior to purchasing a property, but it would result in a proportionate loss on the interest due to be paid.

Lifetime ISA

The Lifetime ISA can be also be used to save for your first home but has the added flexibility of being available as a vessel to put money away as a pension for later in life. There is no limit on how much money you can save each month, as long as you don’t exceed the yearly cap of £4,000. Lifetime ISAs will available to UK residents aged between 18 and 40 from 6 April 2017.

Again the government will offer a 25% bonus however this is paid annually at the end of each tax year, or when a home is purchased. This is one of the biggest advantages of the Lifetime ISA, as interest can be earned on the bonus amount too, whereas the Help to Buy ISA bonus is only applied when you close your account and withdraw the funds to purchase a property.

If you chose to use a Lifetime ISA for pension savings, instead of for buying your first home, any money that is withdrawn prior to your 60th birthday would forfeit the government bonus plus any growth or interest you have earned from it. There is also a 5% charge for making a withdrawal. If you wait until you are 60, everything can be taken out tax free.

Which one to choose?

With the new Lifetime ISA offering more flexibility and better returns, it is likely to prove the winning option for most people as you can contribute more to it. Furthermore, as you will be allowed to have both types of ISA but can only use the bonus from one of them to buy a home, it makes sense to opt for the newer style of account. However, there are several reasons why opening a Help to Buy ISA now is a good idea.

1. The Lifetime Allowance isn’t available until next April, so opening a Help to Buy ISA now means first-time buyers can start contributing straight away. You can then open a Lifetime ISA next year and transfer the Help to Buy funds into it without using up that year’s allowance (as long as you do it within the first year)

2. If you are planning on buying a property before April 2018, then a Lifetime ISA won’t be a viable option – you have to have had it open for a year before you can use it towards a home. A Help to Buy ISA, on the other hand, only requires you to have £1,600 saved in order to get the bonus (which can take just three months of maximum contributions)

3. If you want to set up an ISA for your child, you can open a Help to Buy ISA on their 16th birthday (as you have to be 18 to open a Lifetime ISA) and then transfer the savings over two years later – the only slight difficulty here is that those who won’t be 18 by 5 April 2018 will not be able to transfer their funds over to a Lifetime ISA in the first year, which means when you do transfer it, it will impact on your 2017/2018 £4,000 allowance

Whilst Help to Buy ISAs have been a welcome addition for first-time buyers since they were introduced last year, their appeal is likely to falter once the new Lifetime ISA is introduced next April.

Below is a table outlining the key differences between the two.

  Lifetime ISA Help to Buy ISA
How much can you save? £4,000/yr £2,400/yr (£3,400 in year one)
Can you put lump sums in? Yes No, you need to save monthly
What’s the max bonus? £32,000 (assumes max contribution over 32 years) £3,000
When’s the bonus paid? Annually (thus you get interest on the bonus once it’s paid) When you buy a home (so no interest on the bonus)
Can you invest as well as save? Yes, with cash & shares Lifetime ISAs No. Cash only
What’s the max property price? £450,000 £250,000 (£450k in London)
When can you use it to buy a home? After the ISA has been open 12mths Once you’ve £1,600+ saved (which can be done in three months)
Who can open it? Anyone aged 18 to 40 Any first-time buyer aged 16+
Can I withdraw money if not buying a house? Yes for retirement, but if earlier you won’t get bonus and will pay a 5% Yes at any time, you just forfeit the bonus

If you would like to discuss opening one or both these ISAs, please speak to your Finura Partners advisor.

Sources: https://1stcharteredfp.co.uk/help-buy-vs-lifetime-isa-best/
http://blog.moneysavingexpert.com/2016/04/01/the-help-to-buy-isa-v-lifetime-isa-which-should-first-time-buyers-get/

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