23 Mar 2017
Author: Stephen Breen
The new Lifetime ISA (LISA) is just around the corner – but those who already opened a Help to Buy ISA might be wondering whether or not to switch. Here are the key similarities and differences between the two types of ISA:
The purpose of a LISA is to allow the saver to put money aside for their first home or their retirement – or both.
Help to Buy ISAs, on the other hand, are solely intended for first time buyer deposits.
LISAs are open to everyone aged between 18 and 40. If you were 40 on 6th April 2017, you wouldn’t be able to open a LISA.
The Help to Buy ISA is open to first time buyers aged 16 or over.
Both accounts are individual accounts, so a couple looking to buy a house could each open an account and receive up to the maximum bonus (subject to eligibility).
Note that for LISAs, although you can get an account even if you are not a first time buyer (for example, you might want to save for your retirement), you won’t be eligible for the first time buyer bonus.
You can save up to £4,000 a year into a LISA which can be deposited either as a lump sum, or by paying in whenever you can (you could set up a monthly payment but this isn’t obligatory).
You can contribute to a LISA until the age of 50 (in fact, various sources suggest that the Government is keen to ensure you can continue contributing past the age of 50 – however, the bonus will only be paid up until 50).
With a Help to Buy ISA, you can only contribute an initial sum of up to £1,200 then a monthly amount of £200.
You’ll get a 25% bonus with your LISA, paid until you reach 50. For the 2017/18 tax year this will be paid annually. After that, it will be paid monthly. You can earn interest on the bonus payments.
The LISA bonus is based on your contributions so if you do choose a stocks and shares ISA and your investment shrinks, this doesn’t affect the amount of bonus that is paid to you.
With the Help to Buy ISA, the bonus is 25% – so for each £200 you save, you’ll get an extra £50. This bonus is paid after contracts have been exchanged, so you can’t earn interest on it.
With a LISA, the maximum possible bonus is £32,000 although to achieve this, you’d have to open your LISA aged 18 and continue paying in the maximum £4,000 a year until you reached the age of 50. Remember that the accounts are individual so your partner, if you have one, can do the same.
With a Help to Buy ISA, the Government bonus is capped at £3,000. To get £3,000, you’d have to save £12,000 yourself.
The Help to Buy ISA is a cash only ISA.
The LISA allows investment in cash or stocks and shares, or a combination of both.
First time buyers – property price
A LISA can be used to save towards your first home up to the value of £450,000 (or, as noted, it can be used to save for retirement).
A Help to Buy ISA can only be used to save towards your first home with a purchase price of no more than £250,000 (£450,000 if buying in London).
You can withdraw the funds from a LISA at any time after 12 months towards a deposit for your first home.
However, if you’re using a LISA to save for retirement, you won’t be able to withdraw until you reach the age of 60.
If you withdraw money from your LISA before the age of 60 and it is not used for buying your first property, you’ll have to pay a 25% penalty. This won’t apply in the first year of the scheme.
Note that if you withdraw the money from the LISA for your first home, you can then continue to use the LISA to save for your retirement.
You can withdraw money from your Help to Buy ISA at any time, but you won’t get the Government bonus unless you have saved at least £1,600. The bonus is only available on exchange of contracts.
LISAs will be available from 6th April 2017 subject to providers’ individual offerings.
You will only be able to open a Help to Buy ISA until November 30th 2019. Once opened, you’ll be continue paying into the account after this date but must claim the bonus by December 1, 2030.
Current Help to Buy ISA interest rates include:
- Barclays 2.25%
- Buckinghamshire BS – 2.25%
- Nationwide BS – 2%
- Halifax – 2%
- Virgin Money – 2%
Few providers have said they will have a LISA product available for the launch date – currently only Skipton Building Society and Hargreaves Lansdown have confirmed their LISA will be ready.
Which to choose?
For those with a Help to Buy ISA who are planning to purchase in the next 12 months, a LISA is unlikely to be of interest. The LISA can only be used to purchase a property after 12 months so you would not be able to access funds until at least April 6th 2018.
However, if your plans are more long term, LISAs could be a better deal – they allow you to save more each month and therefore earn a bigger bonus. They also allow you to invest in stocks and shares rather than cash only for the chance of better returns.
If you decide to keep your Help to Buy ISA and also open a LISA, you’ll only be able to use the Government bonus from one account – so you may want to consider transferring the Help to Buy ISA to a LISA.