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magazineShould I transfer my Help to Buy ISA to a Lifetime ISA?
Investors who are saving up for their first home can now choose to transfer their Help to Buy ISA to the new Lifetime ISA. Each product has pros and cons which you need to weigh up before making the switch.
Both types of ISA aim to help people get a foot on the property ladder by offering tax-free growth and Government bonuses. The Lifetime ISA also lets you save for retirement.
The Help to Buy ISA is available for first-time buyers aged 16 and over, whereas the Lifetime ISA can only be opened by people aged between 18 and 39. You can keep contributing to the Lifetime ISA until you turn 50.
Under the Help to Buy ISA you can save up to £1,200 in the first month and then £200 each month thereafter. When you buy a property, a Government bonus of 25% will be added to your ISA but this is capped at £3,000.
The Lifetime ISA, which launched in April 2017, enables you to contribute up to £4,000 a year until you turn 50. Unlike the Help to Buy ISA, there is no monthly payment limit with the Lifetime ISA so the full £4,000 could be deposited in a month,
if preferred.
A Government bonus of 25% is added to each payment you make; meaning a bonus of up to £32,000 can be received.
In the first year of the Lifetime ISA, the bonus will be paid at the end of the tax year and thereafter it will be paid monthly.
Why might it be worth switching?
1. To grow your money
The maximum Government bonus you can receive is considerably greater for the Lifetime ISA than the Help to Buy ISA: £32,000 versus £3,000.
‘A Help to Buy ISA only allows cash savings, whereas a Lifetime ISA also allows you to invest in shares, bonds and collective funds,’ says Hannah Purslow, spokesperson for AJ Bell Youinvest.
‘With cash deposit rates at historical lows and interest rates unlikely to rise quickly, over the long term a Lifetime ISA can offer greater growth opportunities through investment returns from stock market investments.’
2. To better fund a property purchase
The Help to Buy ISA bonus is only available when you’re ready to buy a property and have handed over account details to your conveyancer. You can’t use it to pay the upfront deposit required at exchange of contracts.
The Help to Buy ISA can be used to buy a property that costs less than £250,000 (or £450,000 in London), whereas a Lifetime ISA can be used to buy a property of up to £450,000 anywhere in the country.
3. For greater flexibility
A Lifetime ISA has the added flexibility of being a retirement savings vehicle. If you decide not to use the funds to buy a house, you can access your money tax-free from age 60.
4. To benefit from this year’s special rules
Special rules apply to transfers made during the 2017/18 tax year. If you transfer your Help to Buy ISA into a Lifetime ISA before 6 April 2018, the money you saved into it as at 5 April 2017 won’t impact on your £4,000 annual Lifetime ISA allowance. You’ll get the 25% Government bonus on the entire amount saved.
Any money that you paid into your Help to Buy ISA on or after 6 April 2017 will affect your Lifetime ISA allowance when you transfer. Not all Lifetime ISA providers will accept Help to Buy transfers due to limitations on their systems; yet those that do accept them include AJ Bell Youinvest.
When might a transfer not be suitable?
1. If you want to buy a house within a year
The main reason to stick with a Help to Buy ISA is if you’re aiming to buy your first home in the near future. The minimum annual Government bonus for a Help to Buy ISA is £400, so once you’ve saved £1,600, which can be done in three months, you’ll be eligible for it.
The Lifetime ISA needs to be open for at least 12 months before you can use it to buy a house.
Niki Patel, consultant at investment consultancy Technical Connection, says if you’re considering buying a property before 6 April 2018, a transfer is unlikely to be advisable. You won’t be allowed to use your Lifetime ISA because it’s less than 12 months away and you’ll miss out on the Help to Buy ISA bonus.
2. If you want to access the money early
A transfer wouldn’t be appropriate if you’re not intending to use the funds to buy a house and will want access to the money before age 60.
You can withdraw funds from a Help to Buy ISA whenever you like without penalty but you’ll face a tax charge of 25% on the value of the withdrawal if you withdraw Lifetime ISA funds before age 60 for anything other than your first house purchase (or in cases of terminal illness).
3. If you’re keeping your account in cash
It could be beneficial to delay a transfer in the 2017/18 tax year if you’re keeping your account in cash.
Skipton is currently the only provider of a cash Lifetime ISA at present and offers an interest rate of 0.5%. Many Help to Buy ISAs offer better rates.
‘A saver could maximise their cash savings by opening and funding a Lifetime ISA account with £1 to get the 12 month clock ticking while continuing to invest in a higher interest rate Help to Buy ISA,’ says Purslow at AJ Bell Youinvest.
‘If they then transfer to a Lifetime ISA before the end of the 2017/18 tax year, they would get the 25% bonus on the interest-boosted cash. (EP)
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
