First-time buyer: Should I transfer my Help to Buy ISA to the Lifetime ISA?
The Help to Buy ISA (H2B ISA) has proven popular with first-time buyers as more than 27,000 property transactions using the scheme were made in the first year since launch. However, with the new kid on the block, the Lifetime ISA (LISA), launching in just over two weeks, will it lead to a swathe of transfers away from the H2B ISA?
Below we outline a summary of each savings scheme, the rules surrounding transfers and explain whether you may want to consider transferring from the old into the new government initiative.
Comparing the Help to Buy ISA to the Lifetime ISA
On 6 April, the LISA will launch allowing adults aged over 18 and under 40 to save up to £4,000 a year where they’ll receive a government bonus of 25% (excluding investment interest or growth) – £1,000 on top. This is paid annually at the end of the 2017/18 tax year and monthly from then on.
The money can be used to buy your first home or for retirement, but for first-time buyers, the sum can be used to buy a property worth up to £450,000 nationwide, as long as the account holder has held the LISA for at least 12 months. See YourMoney.com’s Lifetime ISA guide for more information.
LISA contributions can continue until the age 50 which means savers can put away a total of £128,000 which is matched by a maximum government bonus of £32,000.
While the LISA is similar to the H2B ISA and both savings schemes share the end goal of helping wannabe property owners onto the housing ladder, there are some clear differences.
The H2B ISA launched in December 2015 and is available for first-time buyers aged 16 or over, so older borrowers qualify too. You can save up to £200 per month (though in the first month you can deposit £1,200) and for every £200 saved, the government will top it up with a 25% bonus, capped at £3,000.
In order to claim the bonus, you need to have saved a minimum of £1,600 and it can only be used against the cost of buying a house – worth up to £450,000 in London or up to £250,000 elsewhere. The scheme is open for new savers until 30 November 2019 while for those who’ve already opened one before this date, you can continue saving into it until 30 November 2029. See YourMoney.com’s Help to Buy ISA: the facts for more information.
Currently there are nearly 30 banks, building societies and credit unions offering the H2B ISA with Barclays Bank and Buckinghamshire Building Society joint first in the best buy table paying 2.25% gross AER, according to financial data site Moneyfacts.
While H2B ISAs are cash savings products, LISAs allow you to invest in either cash or stocks and shares. However, only three investment platforms will launch LISA on 6 April (Hargreaves Lansdown, Nutmeg and The Share Centre) and not a single bank or building society has said it will be ready to launch a cash version from April. Skipton Building Society is the first high street lender to offer a cash LISA, but savers will have to wait until June.
What are the rules around transferring and operating the schemes?
At the start of the new tax-year, first time buyers will be able to hold both a H2B ISA and a LISA. However, you will only be able to use the bonus from one of the schemes when purchasing a first home (for H2B ISA you need a minimum of £1,600 while for LISA, you must have held the product for a minimum 12-month period).
During the 2017/18 tax-year only, special rules apply to the LISA. Until 5 April 2018, you can transfer your H2B ISA (valued at 5 April 2017) to a LISA without the amount contributing to the £4,000 annual LISA allowance. Further, the whole amount saved will benefit from the 25% government bonus.
Hargreaves Lansdown, one of three investment platforms ready to offer the new LISA, adds that if you transfer your H2B ISA to a LISA by 5 April 2018, you’ll be able to invest up to £4,000 in a LISA and up to £20,000 into a cash, stocks and shares or innovative finance ISA. See YourMoney.com’s Which ISA is right for you? A round up of the six products available for more information.
If contributions are made to a H2B ISA after 5 April 2017 and subsequently transferred to a LISA or you make a transfer from a H2B ISA after 5 April 2018 then the transfer will count towards the £4,000 LISA allowance, though you would still qualify for the bonus. If you contribute to a H2B ISA in any given tax year, then that will count towards your ISA allowance.
For those who don’t have an existing H2B ISA, if you pay the maximum £4,000 in a LISA, as the maximum ISA subscription limit is £20,000 for the 2017/18 tax-year, savers can still deposit up to £16,000 into another cash and/or stocks and shares ISA.
Is it worth transferring your Help to Buy ISA to a Lifetime ISA?
For Laith Khalaf, senior analyst at Hargreaves Lansdown and Niki Patel, technical consultant at Technical Connection, the main reason to stick with the H2B ISA is for first-time buyers who are looking to buy sooner, rather than later.
Khalaf says: “The main reason to stick with the H2B ISA is if you are imminently buying a property because the government bonus on a LISA will only be paid after 12 months from the point at which you set it up until April 2018, at which point the top up will be paid monthly.”
He says that Hargreaves Lansdown expects “high demand” for the LISA product and it expects people to “simplify their affairs” by consolidating their H2B ISA into a LISA. In addition the LISA will appeal to longer-term savers looking to invest in the stock market rather than holding cash.
Patel says: “The idea is that if you don’t intend to buy in 2017/18 you would transfer a H2B ISA into the LISA, so roll it up into one product so you don’t lose out on the bonus from both.
“If you’re eligible for a LISA, as you can save more in it and use it on properties of a higher value it usually wins.”
Other key considerations for savers are on the penalties for early withdrawals as well as what the money actually goes towards in the process of buying a property.
With a H2B ISA, you can withdraw your money at any time so it offers flexibility to savers. However, with the LISA, there is a 25% government charge on unauthorised withdrawals, except where the saver is 60, bought their first property when under the age of 40 or in the event of terminal illness, with less than a year to live. However, again for 2017/18 tax year when the bonus is paid at the end of the period, the government has scrapped the 25% charge, saying that it “could create a difficult case where people face a 25% government charge up to 12 months before they receive the bonus”.
If people want to withdraw from their LISA in 2017/18, they must close their account, and there will be no government charge to do so. In addition, no bonus will be paid on closed accounts.
The H2B ISA bonus contributes to your overall mortgage deposit, increasing the size of your savings for a first home. With the LISA, the funds, including the bonus can be put towards an exchange deposit, provided the property purchase is completed within 90 days of your conveyancer receiving the withdrawn funds from you LISA manager. There are also no restrictions on which stage of the property purchase you can put your LISA funds towards.
Danny Cox, chartered financial planner at Hargreaves Lansdown concludes: “The LISA offers higher contribution allowances, the option to build a bigger deposit by investing rather than just saving in cash, and a more immediate bonus payment, all of which suggest LISA is the preferable option for investors in the target age range.”