Lifetime or Help to Buy ISA? What you and your children need to know

If you or your children are looking to save up for a deposit for a new home, you’ve probably considered putting your savings in an ISA. With a wide choice of different types of ISA, they are an excellent tax-efficient way to save up the cash you need to put down a deposit on a property.

In 2017, the government complicated your choices further by adding another type of ISA to the range. The Lifetime ISA is aimed at younger people and has the dual aim of helping people to save up the deposit for a home or to put money aside for their retirement.

Currently, the Lifetime ISA is available in addition to a competing product: the Help to Buy ISA. So, which is the right choice for you?

The Lifetime ISA explained

Launched in April 2017, the Lifetime ISA (sometimes called LISA) lets under-40s invest up to £4,000 each tax year. As well as tax-efficient growth, any money saved in a Lifetime ISA receives an additional 25% bonus from the government.

You can use a Lifetime ISA to:

• Save for the deposit for your first home
• Save for your retirement

Figures from the Skipton Building Society show that 3,641 homes were bought with the help of a Lifetime ISA in 2018.

If you’re using a Lifetime ISA to save a deposit for a property, there are some additional criteria:

• The property must be in the UK
• You must not have owned a property before
• You must use a mortgage to buy (you can’t buy outright for cash)
• The property must cost £450,000 or less
• It must be your main residence, not an investment property.

If you’re buying jointly and the other party has also never owned a property, then they can also save into a Lifetime ISA. You can therefore effectively save up to £8,000 a year towards your deposit and both of you will receive the government bonus.

Lifetime ISAs are only available to people aged between 18 and 40, and you must have held your Lifetime ISA for at least a year before you qualify for the government bonus.

When you’re ready to buy, you instruct the LISA provider to send your savings to your solicitor. Don’t withdraw the money yourself or you’ll be hit with a 25% withdrawal charge.

If you change your mind and decide not to buy, you can withdraw your savings from your LISA, but you’ll pay a 25% charge.

An alternative option is to leave your money invested until you reach 60 years old. Using the Lifetime ISA for its other purpose – retirement savings – means you can carry on paying in until you’re 50. You can access your savings (with the government bonus) after the age of 60.

The Help to Buy ISA explained

The Help to Buy ISA has been available since December 2015. It is designed for first-time buyers aged between 16 and 40 to save up the deposit for their first home.

It offers a similar government bonus to the Lifetime ISA. You can make a deposit of up to £1,000 when you open the account and you can save any amount you want each month up to a maximum of £200.

The government adds a 25% bonus, although you must have saved a minimum of £1,600 to receive the bonus. There is a maximum bonus of £3,000 (for which you would have saved £12,000).

You will also earn interest on the amount you save, but you won’t earn interest on the bonus as this is only paid when you come to buy a property. Your solicitor will apply for the bonus as part of the conveyancing process.

Again, if you’re buying jointly and you’re both first-time buyers then your partner can also open a Help to Buy ISA and benefit from the government bonus.

One of the advantages of the Help to Buy ISA is that you don’t have to wait a year to use the cash. If you open your Help to Buy Isa with £1,000 and save £200 a month for three months, you can benefit from a bonus of £400 after just three months.

Note that Help to Buy ISAs will only be available until November 2019. After this time, you won’t be able to open a new Help to Buy ISA. If you already have such an account open, you can continue to save into the account, and you can apply for the government bonus until December 2030.

Seven times more people choosing a Lifetime ISA than a Help to Buy ISA

With two similar ISAs available, which should you choose?

Figures from Nottingham Building Society – one of the few providers to offer both a Lifetime and Help to Buy ISA – show that seven times more people are choosing the Lifetime ISA than the Help to Buy ISA.

Although the Lifetime ISA can be used for retirement savings, the mutual said that more than three-quarters of savers (78%) who opened a LISA were doing so in order to save the deposit for their first home.

Jenna McKenzie-Day, Senior Savings Manager at The Nottingham says: “We’re not surprised by the statistics because we know LISA is a genuinely beneficial account that in many cases is helping people buy their first home sooner.

“A large majority of those opening a LISA with The Nottingham are first-time buyers planning to use the funds for their first home. That means potential bonuses of up to £1,000 a year are available for every £4,000 saved.”

Since the start of 2019, the building society has opened seven times more Lifetime ISAs than Help to Buy ISAs with the gap expected to grow wider as the November deadline for opening a Help to Buy ISA approaches.

McKenzie-Day adds: “Although there are more first-time buyers opening the account, it doesn’t mean they won’t turn into retirement savers. That’s why it’s called a Lifetime ISA – you can continue saving into it once funds have been used for a house purchase.

“Switching to a long-term savings goal means people can continue to benefit from the government bonus payments and work towards boosting their retirement pot with the same account.”

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.