With the launch of the Lifetime ISA in 2017 and the closure of the Help to Buy ISA in 2019 many are wondering whether they should be transferring their Help to Buy ISA to a Lifetime ISA.
Both ISAs are aimed at helping first time buyers get onto the property ladder but there are some key differences.
The difference between a Help to Buy ISA and Lifetime ISA
First, the annual amount you can save into a Help to Buy ISA is less than for a Lifetime ISA.
Even though it is closed to new applications, existing Help to Buy ISA holders can contribute up to £2,400 per tax year.
You can contribute up to £4,000 per tax year into a Lifetime ISA.
There are also restrictions on how flexible your contributions can be with a Help to Buy ISA.
Second, the bonuses can be a lot higher for the Lifetime ISA.
You will need to have saved a minimum of £1,600 inside a Help to Buy ISA to get any bonus and the total lifetime bonus is limited to £3,000.
For Lifetime ISAs there is no minimum contribution to qualify for a bonus and you can earn up to a maximum £1,000 each year.
You also don’t have to wait for your Lifetime ISA bonus, it will be paid into your account a short time following your contribution so you can start earning a return on the bonus as well as your contribution.
For Help to Buy ISAs you only get the bonus paid once you buy your first home.
Thirdly, when it comes to buying your first home the Lifetime ISA offers a little more scope as it allows you to purchase a property worth up to £450,000 anywhere in the UK.
If using a Help to Buy ISA, you are limited to properties worth £250,000 outside of London and £450,000 in London.
Finally, a significant difference is the fact you cannot invest in a Help to Buy ISA. It will only earn interest like a normal bank savings account.
The Lifetime ISA however has dual purposes. It can be used to help buy your first home, but you can also use it as a retirement savings account. Providing you don’t withdraw from a Lifetime ISA until age 60 you don’t need to use it to buy your first home.
The Lifetime ISA allows you to invest your money in things like stocks and shares which could earn a greater return over the long term although there is no guarantee.
Should you transfer a Help to Buy ISA to a Lifetime ISA?
The key thing to consider when deciding whether to transfer a Help to Buy ISA to a Lifetime ISA is if, and when , you plan to buy your first home.
If you are already over age 40 then you will not be able to open a Lifetime ISA.
If you are planning to buy your first property within a year, then it makes sense to keep your Help to Buy ISA as you can only use your Lifetime ISA towards buying your first home once it has been opened a year.
If you are not entirely sure you will definitely use the money inside your Help to Buy ISA to buy your first home, then again it may make sense to stick with the Help to Buy ISA as this allows you to withdraw your money without penalty. A Lifetime ISA will only allow you to do this once you are aged 60 or above.
However, if you have no immediate plans to buy your first home and are happy keeping your money saved over the long term then you could earn far more in bonuses and investment returns with a Lifetime ISA.
When it comes to transferring your Help to Buy ISA to a Lifetime ISA you can only transfer the maximum Lifetime ISA allowance each tax year, £4,000. So, if your Help to Buy ISA was valued at £12,000, you would need to transfer this over across three tax years.
Once you have transferred your Help to Buy ISA to a Lifetime ISA the key thing to do is get the right investment strategy in place.
If you are planning to use the Lifetime ISA money in the next few years to buy your first home, then you should really keep your money in cash earning interest.
If, however, you are prepared to hold the money for the long term, as in longer than 10 years then you should pick an investment strategy that goes for growth. One that aligns with your values and invests in the growth areas of the future.
Carl Roberts, Director
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
