Help to Buy ISA savers missing out on free cash

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Help to Buy ISA savers who have had their accounts for years could be missing out on free money towards their house deposit by not switching to a Lifetime ISA. While Help to Buy ISAs have closed to newcomers, around 2.5 million people still have the accounts* where they are saving for their deposit for their first home.

Savers in both the Help to Buy ISA and Lifetime ISA get the same 25% Government bonus on money they save, but the Government handout is capped at a maximum of £3,000 for Help to Buy ISAs where with the Lifetime ISA it’s only capped at £1,000 a year. Anyone who has had their Help to Buy ISA account open for more than four and half years could have maxed out the bonus and will no longer be getting the 25% Government boost to their money. What’s more, anyone who thinks they will hit this threshold before they buy a house could miss out on money in the future.

Help to Buy ISA savers could pay in £1,000 when they opened the account and then £200 a month thereafter, which means it would take four years and seven months before they had built up enough money in their pot to reach the maximum Government bonus. After this they can keep contributing £200 a month but they won’t get the extra £50 a month top-up from the Government. However, if these savers switched to a Lifetime ISA and kept paying in the same £200 a month, they would get a £50 boost each month.

More about our Lifetime ISA

Here are three scenarios where it might be better to switch:

The low-level, long-haul saver

Someone who is putting £200 a month into their Help to Buy ISA but hasn’t had it open for that long might not think they need to switch, as it will be a while before they hit the £3,000 Government bonus cap. But if they know it’s going to take them five years or more from opening the account before they’ve saved enough for a deposit then they could easily hit that cap in the future. If you think that you will hit that £3,000 Government bonus threshold at some point you should consider moving your money to a Lifetime ISA before you hit the maximum bonus cut-off.

If you know that it will be many years before you want to buy and you will hit the Government bonus limit during that time, you could be better switching now. If you have less than £4,000 saved in your account now you could open a Lifetime ISA before the end of the current tax year, transfer all your savings and from April 6th will get a new £4,000 Lifetime ISA allowance to play with.

What’s more, with the annual limit of £4,000, rather than a monthly use-it-or-lose-it limit of £200 with the Help to Buy ISA, the Lifetime ISA gives more flexibility of when you can pay money in and how much. It means if you got a windfall of money above £200, for example, you could pay it all in in one month and resume your regular savings the following month.

The limit approacher

Someone who has built up a decent amount of money in their Help to Buy ISA should think about switching soon. That’s because Help to Buy ISA transfers count towards the annual £4,000 Lifetime ISA allowance limit, meaning savers could find it takes a number of tax years to switch their account once they have hit the limit, as they will have amassed more in the account.

For example, someone who started saving in a Help to Buy ISA just before they closed to new customers in November 2019 who saved £200 a month would have £8,200 saved, and would be eligible for a Government bonus of £2,350. But if they save for another year-and-a-half they’ll hit the £3,000 Government bonus limit. If they know they’re buying a house soon it wouldn’t make sense to switch, but if the property purchase dream is still years away, they’d be better switching now.

But with savings of £8,200 it will take just over two tax years before they can transfer their entire Help to Buy pot into their Lifetime ISA. But if they move quickly and open a Lifetime ISA before the end of the current tax year they could have transferred all but £200 of their Help to Buy ISA by the middle of next month.

The limit buster with a long-time horizon

Someone who opened a Help to Buy account when they first launched and paid in the maximum allowed would have hit the maximum Government handout in 2019. If they’d switched to a Lifetime ISA at that point and carried on paying in £200 a month they could have made £1,650 more for their deposit savings.

If you have hit that limit there is still time to claim your free cash, but it only makes sense if you have a long time until you plan to buy. Someone who had saved £12,000 in their Help to Buy ISA would have hit that £3,000 limit, meaning any future savings they make won’t be topped up. However, it will take three tax years to transfer that £12,000 into a Lifetime ISA, at a rate of £4,000 a year. That means it only makes sense to switch if you know that you’re years away from buying a property.

However, if you open a Lifetime ISA before the end of the current tax year you can transfer £4,000 now and another £4,000 after April 6th, meaning that all your money could be transferred by early-April next year. With the tax year end nearing the clock is ticking for savers to lock in this year’s Lifetime ISA allowance.

Things to consider

Savers thinking of making the switch need to be aware of a few things: first, they need to have the Lifetime ISA open for more than 12 months before they can use it to make a house purchase. Second, they need to be sure they want to use the money to buy a first property, as the account isn’t as flexible as a Help to Buy ISA – if they withdraw the money for any other purpose (other than at the age of 60) they’ll face a 25% exit penalty.

However, savers with spare cash will be able to boost their deposit pot further as they can contribute up to £4,000 into a Lifetime ISA each year, rather than just the £200 a month the Help to Buy ISA allows. Those who are a number of years away from buying their first property could also consider opening an investment Lifetime ISA, rather than keeping the money in cash. This could boost their returns above the rates offered on cash currently, although this is only really an option for anyone wanting to buy in five years or more.

*Source: Based on the FCA’S latest Financial Lives survey: https://www.fca.org.uk/publication/research/financial-lives-survey-2020.pdf

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change. Tax and LISA rules apply. A Lifetime ISA isn't for everyone. If you withdraw money before age 60, unless it's to buy your first home, you'll pay a government withdrawal charge of 25%. And if you choose to save in a Lifetime ISA instead of enrolling in, or contributing to, your workplace pension scheme, you'll miss out on your employer’s contributions. Your current and future entitlement to means-tested benefits may also be affected.

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Laura Suter

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.