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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

You’ve only got until 5 April this year to take advantage of a generous initiative

Wannabe first-time house buyers and savers craving a more flexible retirement savings option were given a boost in April 2017 when the Lifetime ISA was launched.

The product, which to-date has only been adopted by a handful of providers including AJ Bell, is available to anyone aged 18-39 and allows you to invest in a range of stocks, funds and bonds in the same way as a Stocks and Shares ISA.

It also comes with a significant extra benefit. While the amount you can save each year is capped at £4,000 (compared to £20,000 for a normal ISA) you get an automatic 25% bonus on your savings, worth up to £1,000.

You can continue paying in and receiving the 25% bonus up until your 50th birthday. Furthermore, withdrawals are tax-free if you are using the money to purchase your first home, you are aged 60 or over, or if you become terminally ill.

In essence, the Lifetime ISA is a souped-up version of the Help-to-Buy ISA.

Help-to-Buy ISAs come with a 25% uplift and you can deposit up to £1,200 in the first month you open an account and £200 thereafter – meaning there’s less free money on offer than through a Lifetime ISA.

It’s worth noting the Help-to-Buy ISA bonus is only paid on completion of the purchase of your first home while the Lifetime ISA bonus will be paid monthly from April 2018 onwards, meaning it can potentially benefit from investment growth. You can withdraw money from your Help-to-Buy ISA at any time, but you won’t receive any bonus.

Early withdrawals from a Lifetime ISA for other purposes are also possible, but come with a hefty 25% penalty on the money you take out.

Because of the extra benefits associated with a Lifetime ISA, anyone who has a Help-to-Buy ISA should seriously consider transferring their existing pot.

And there’s an extra reason you might want to get your skates on. Savers have until 5 April 2018 to transfer their Help-to-Buy ISA savings into a Lifetime ISA without using up their annual Lifetime ISA allowance.

Someone who transferred £4,400 from their Help-to-Buy ISA – the maximum that could be deposited between its launch in December 2015 and April 2018 – into a Lifetime ISA and also contributed the £4,000 Lifetime ISA limit would receive a 25% bonus on the entire amount, increasing the value of their pot from £8,400 to £10,500.

It’s worth noting that only the value in the Help-to-Buy ISA as at 5 April 2017 will be eligible – so anything paid in after that date will count towards the £4,000 limit for this tax year.

Tom Selby,

Senior Analyst, AJ Bell

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