The Lifetime ISA (LISA) replaced the now-defunct Help to Buy ISA in 2019 as the main account offering government support to first-time homebuyers.
However, even though you can’t open a new Help to Buy ISA, you may still hold an existing one. This may leave you wondering whether you should move your savings over to a Lifetime ISA instead.
But how do you know which is best in the battle of Lifetime ISA vs Help to Buy ISA? Should you consider transferring your funds from your Help to Buy ISA to a Lifetime ISA? What are the main differences between the two? Read on to find out.
- The main difference between a Lifetime ISA and a Help to Buy ISA is the availability of the two accounts. The former can be opened by anyone aged 18 – 39, whereas the latter is no longer available.
- Both accounts are tax-free savings accounts to help first-time buyers with the purchase of their first home.
- The two accounts have different contribution limits and rules.
- No set-up fees, trading fees, transaction fees or exit fees
- 0% Portfolio Management fees for 6 Months on all new accounts
- Full transparency on fees and performance backed by excellent customer service
As with all investing, your capital is at risk. Tax treatments depend on your individual circumstances and may change in the future. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.
What is a Lifetime ISA?
A Lifetime ISA is a tax-efficient savings account designed to help first-time buyers secure a deposit on their first home, or to help individuals bolster their retirement savings.
They can be opened by anyone aged 18 – 39, and you’ll receive a 25% government bonus on all your contributions up to the annual contribution limit of £4,000. Your payments can be made however you like, from several smaller payments to one or two larger lump sums each year.
However, the main downside is that any money saved into the account must be used for the purchase of a home or left until age 60. If you withdraw money from the account for any other reason, you will face a 25% withdrawal charge.
Benefits of a Lifetime ISA
Added 25% government bonus
The main appeal of a Lifetime ISA is that you receive a 25% government bonus, paid monthly, on all contributions made into the account. Because you can contribute £4,000 into a Lifetime ISA each tax year, that means the maximum bonus you can receive in any given tax year is £1,000.
They can be topped up until age 50
Although you can only open a Lifetime ISA between the ages of 18 and 39, you can continue to pay into your account until you reach age 50. That means, if you open the account and contribute the maximum amount every year from age 18, you could receive a total government bonus of £33,000.
Can be opened as a Cash or Stocks and Shares account
There are two different types of Lifetime ISA that you can open: a Cash Lifetime ISA and a Stocks and Shares Lifetime ISA.
Cash Lifetime ISAs
A Cash Lifetime ISA allows you to store your money in cash with a provider. You’ll earn interest over time, depending on the interest rate.
Stocks and Shares Lifetime ISAs
By opening a Stocks and Shares Lifetime ISA, you can invest your savings in the stock market. A Stocks and Shares ISA offers the opportunity for your money to earn higher returns than it might generate in interest in a Cash ISA, but investing is always a risk.
The value of your investments can go down as well as up, so you may not get back the full amount you put in.
Drawbacks of a Lifetime ISA
£4,000 contribution limit each year
One of the main drawbacks is the Lifetime ISA limit, which means that you may only contribute a total of £4,000 each tax year into your account. Once you add the government bonus, that equates to a maximum of £5,000 saved every year.
Can only be used on the purchase of a house or left until age 60
Another main downside is that your Lifetime ISA savings can only be used to buy a home or help fund your retirement. If you withdraw money from your account for any other reason, you will need to pay a 25% withdrawal charge.
This means that, depending on the performance of your ISA, you may end up with less money than you initially put in.
Can only be opened by those aged 18 – 39
Unlike other savings accounts on the market, a Lifetime ISA can only be opened by those aged between 18 and 39. If you aren’t within that age range, you will not be able to open one.
Must wait to access your funds
If you open a new Lifetime ISA, you must wait at least a year before you can use the savings to purchase your first property.
Property price limit of £450,000
Lifetime ISAs can only be used to purchase properties worth up to a maximum of £450,000. If a first-time buyer purchased a property above this limit with the funds in their LISA, they would have to pay the 25% withdrawal charge. If you are looking to buy in London, you may struggle to find a suitable property within the limit.
What is a Help to Buy ISA?
Help to Buy ISAs are savings accounts that were available for first-time buyers up until November 2019. Those who opened a Help to Buy ISA before they were taken off the shelf can still use and benefit from their account until November 2029.
A Help to Buy ISA gives a 25% government bonus for contributions up to £200 a month, totalling £2,400 a year. The maximum government bonus you can benefit from is £3,000, as you only receive it on the first £12,000 saved into the account. This bonus is paid to you after the purchase of your first home is complete.
Benefits of a Help to Buy ISA
Government bonus on contributions
You receive a government bonus of 25% on your Help to Buy ISA contributions, which is paid to you after the purchase of your first home. You can benefit from this government bonus on up to £12,000 of your savings in a Help to Buy ISA, meaning the maximum bonus available is £3,000.
Easier to achieve saving goals
The smaller £200-a-month limit on Help to Buy ISA contributions makes saving the maximum amount more achievable and may help you more effectively plan your finances.
Drawbacks of a Help to Buy ISA
Unavailable for new savers
Help to Buy ISAs are no longer available, meaning that new applicants will need to find an alternative method of saving.
Will only remain active until November 2029
Since they are now unavailable to new applicants, existing accounts will expire in November 2029. Owners of active Help to Buy accounts must use their funds for a home purchase before then and must claim their government bonus by December 2030. If you do not claim the bonus in time, you will lose it.
Can only receive a bonus on £12,000 of contributions
The maximum amount you can save into a Help to Buy ISA while also benefitting from the government bonus is £12,000, which is unlikely to be enough for a full deposit on a home. Help to Buy ISAs also have a monthly contribution limit of £200, totalling an annual maximum of £2,400.
Can only be used on certain properties
The bonus from a Help to Buy ISA can only be claimed if the property you choose to purchase has a value below £250,000, or £450,000 in London.
You must wait to claim your government bonus
While you also receive a 25% bonus on your contributions into a Help to Buy ISA, it is given to you only after you have completed the purchase of your first home.
This means that you cannot put the Help to Buy ISA bonus towards the deposit, and you must fully fund the initial payment yourself.
Key differences between a Lifetime ISA and a Help to Buy ISA
|Lifetime ISA||Help to Buy ISA|
|Availability||Available to anyone aged 18-39. Can be topped up until age 50.||No longer available to open. Can be used until November 2029.|
|Annual contribution limit||£4,000 each tax year.||£200 a month, or £2,400 a year.|
|Government bonus||25% on all contributions, added monthly. Useable for initial deposit.||25% paid back to you after the completion of your first purchase. Cannot be used for initial deposit.|
|Maximum property purchase price||Up to £450,000 anywhere in the UK.||Up to £450,000 in London, or up to £250,000 elsewhere in the UK.|
|Withdrawal penalty||25% withdrawal penalty if used for anything other than a house purchase and before age 60.||No withdrawal penalty, meaning your money can be used flexibly.|
Which is better: A Lifetime ISA or a Help to Buy ISA?
As you can’t receive a government bonus on both a Lifetime ISA and a Help to Buy ISA, you’ll need to choose just one to commit to. The best choice for you will likely depend on your situation and personal circumstances.
Lifetime ISAs have the potential to generate a greater bonus if saved over a long enough timeframe, and that money can be used for the deposit on your home.
If you are sure that you will one day buy a home in the UK, a Lifetime ISA probably offers a better opportunity to save. And even if you don’t, that means you will have a pot saved for retirement instead.
Equally, there’s no charge if you withdraw money from a Help to Buy ISA for reasons other than buying a property.
This added flexibility may make it the more appropriate account for you.
Frequently asked questions
Can I have both a Lifetime ISA and a Help to Buy ISA?
Can I transfer funds from a Help to Buy ISA into a Lifetime ISA?
If you choose to open a Stocks and Shares ISA, be aware that 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.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.