Should you swap your Help to Buy ISA for a Lifetime ISA?

Prospective homeowners are being urged to switch their Help to Buy ISA to the new Lifetime ISA to help them save for a deposit more quickly.

Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “Over 500,000 Help to Buy account holders should be considering their option to transfer to a Lifetime ISA. With the right planning this could increase their deposits and help them to get onto the housing ladder more quickly.”

So how will transferring to a Lifetime ISA get you towards your deposit target more quickly?

The Lifetime ISA was introduced on 6 April and allows anyone younger than 40 to put away up to £4,000 a year until they are 50.

This compares to the Help to Buy ISA which gives first-time buyers saving for a deposit the opportunity to put away £200 a month in a dedicated ISA (with the exception of the first month when you can contribute £1,200).

With the Lifetime ISA and the Help to Buy ISA the government will top them  both up by 25%.

However, you could potentially get a greater bonus with the Lifetime ISA as you can put in more each month.

As you get paid interest as you save along the way with a Lifetime ISA, rather than when you buy your property as with a Help to Buy ISA, you also get returns on the government bonus.

The more you invest and the longer you invest for, the greater the compounding effect and the larger the value of your Lifetime ISA pot.

The Lifetime ISA also gives you the option to invest in the stock market which offers the potential for greater longer term returns, helping you build a larger deposit more quickly.

Another advantage is that the Lifetime ISA can be used towards a deposit on a first home worth up to £450,000 in the UK or taken tax free at 60.

The property price for a Help to Buy ISA is capped at £250,000 (£450,000 in London). This means a Lifetime ISA could provide you with more scope to buy the first home that is right for you.

Deposits are typically in the region of 10% of the value of a property and can run into tens of thousands of pounds. For many aspiring home owners they are the biggest barrier to getting onto the property ladder.

“Progressively rising house prices have made it increasingly difficult for young people to buy their first home. The Help to Buy and Lifetime ISA give hard cash incentives to support that important first step onto the property ladder,” said Cox.

A Lifetime ISA has to be in force for a full 12 months before any bonus is paid, therefore if you plan to buy your first home within the next year it is best to stick with Help to Buy.

It is also important to remember that if you choose to take your money out early from the Lifetime ISA and it is not for a deposit you will be charged 25% of the amount withdrawn.

The Help to Buy ISA will continue to be available to new applicants until 2019, after that you will have to take out a Lifetime ISA.

However, despite the advantages of the Lifetime ISA over the Help to Buy version, choice is limited.

The big banks and building societies have failed to get on board with the scheme, with only Nutmeg, The Share Centre and Hargreaves Landsdown ready to offer a Lifetime ISA at the launch.

Hannah Maundrell, editor in chief money.co.uk, said: “Free cash to top up your savings sounds like a no-brainer, but Lifetime ISAs come with a sting in the tail so you need to be careful. Fail to play by the rules that dictate how you can get at your cash and you will be hit with hefty fees, losing 25% of the amount you take out.

“Most people shouldn’t use Lifetime ISAs as a replacement for a pension – do this and you will miss out on tax benefits and extra contributions from your employer. Getting a Lifetime ISA and a pension could be a smart move, but you need to be able to afford to stash a sizeable amount away.

“Giving people the option to have a cash or investment account is a good thing when it comes to the Lifetime ISA but you need to choose carefully. If you’re planning on saving to buy a home in the next few years, a cash Lifetime ISA is likely to be better although your options will be very limited.

“If you’re going to use it to fund part of your retirement at 60 an investment Lifetime ISA could be more lucrative in the long run but don’t be lulled into a false sense of security. Investing does come with a level of risk even though it’s via a government initiative.”

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