Help to Buy vs Lifetime – which ISA is best?

Introduced in April 2017, the Lifetime ISA offers an alternative to the Help To Buy ISA. It’s important to consider which is best for you and your needs, or those of your children or even grandchildren, for although the two savings schemes share some similarities, there are also key differences.

The Help To Buy ISA allows you to save up to £200 each month to save for a deposit on your first home. The government then boosts your savings further to the tune of 25%, up to a total limit of £3,000, as long as you’re a first time buyer purchasing a property priced up to £450,000 in London and up to £250,000 everywhere else in the UK. There is no minimum deposit each month, and you’re also able to pay in £1,000 when the account is opened that doesn’t count towards your monthly savings.

Available up to Autumn 2019, anyone aged sixteen or over is entitled to open a Help To Buy ISA. The accounts are limited to one per person, which means both people in a couple can have an account and benefit from the bonus.

The Lifetime ISA is based on similar principles but has several important differences, with the most significant being that it can be used either to save for purchasing your first home or be put away as a pension for later in life. There’s no limit on how much you can save each month as long as you don’t go over the yearly cap of £4,000.

Again, the government offers a 25% bonus, but this is paid whether you use the money to purchase your first home up to a price of £450,000 anywhere in the country, or keep it for later in your life. Any money that’s taken out before your 60th birthday and not used for purchasing your first home will forfeit the government bonus plus any growth or interest earned from it, as well as incurring a 5% charge. If you wait until after you’re 60, you can take out everything tax-free.

You’re allowed to have both a Lifetime ISA and a Help To Buy ISA but you will only be able to use the bonus from one of the two accounts to buy a home. One key difference is that with the Lifetime ISA you get the government top up when you actually make your first contribution but with the Help to Buy ISA, you only get it once you’ve used your money as a deposit on your own home. So if your intention is to get the government to help you get a deposit together, the Lifetime ISA would be the better option as you would have the money in hand.        

If you want to set up an ISA for your child, however, you could consider opening a Help To Buy ISA on their 16th birthday then transferring the savings to a Lifetime ISA two years later which will allow you to take full advantage of the government bonuses.

It’s also worth being aware of a tax planning opportunity, available until the end of the tax year in April, which could boost your savings by an additional £1,100, thanks to the Help to Buy ISA small print, relating to the transfer of money saved before the launch of the Lifetime ISA on 6th April 2017.

For example, someone who had saved the £4,400 maximum amount into a Help To Buy ISA before April 2017 could transfer this into a Lifetime ISA before 5th April 2018. As this wouldn’t contribute to their limit, they could then save a further £4,000 into the Lifetime ISA for a total of £8,400. The 25% bonus would then be added to the entire £8,400 in April next year, giving an additional £2,100. In any other year, the maximum top-up which could be earned from the Lifetime ISA would be £1,000.

If you have any queries about whether the Help to Buy or Lifetime ISA is more suitable for your requirements, do get in touch with us.

Please note: To open a Lifetime ISA account you must be between the ages of 18 and 40