A year on from the Help to Buy ISA’s big reveal, the government has introduced another tax-free savings solution to the club: The Lifetime ISA.
With both the Help to Buy ISA and the Lifetime ISA offering first-time buyers 25% bonuses on their savings, many have described these accounts as ‘no brainers’.
But with so many rules to get our heads around, these savings options have understandably caused some confusion and many are questioning which of the two is best for their circumstances.
In this post I’ll weigh up these two savings options and look at the pros and cons of each:
| How much can you save? | £4,000 a year | £2,400 a year (£3,400 in year one) |
| Can you put lump sums in? | Yes | No, you need to save monthly |
| Government bonus | 25% | 25% |
| What’s the most you’ll get from the government annually? | £1,000 | £850 in year one. £600 each year after that |
| What’s the most you’ll get from the government in total? | £32,000 (if you deposit the maximum amount monthly over 32 years) | £3,000 (this will take you 4 years and seven months at the minimum) |
| When’s the bonus paid? | At the end of each tax year (so you’ll earn interest on the bonus as well as your own contributions) | When you buy a home (so you’ll only earn interest on your own contributions) |
| What’s the max property price? | £450,000 | £250,000 (£450k in London) |
| When can you use it to buy a home? | After the ISA has been open for 12 months | Once you’ve saved £1,600 or more. This can be achieved in 3 months at the minimum |
| Who can open it? | Anyone aged 18 to 39 | Any first-time buyer aged 16+ |
You can save more money in the Lifetime ISA
You can place up to £4,000 a year in the Lifetime ISA, giving you a maximum of £1,000 from the government.
You can’t place more than £200 a month in the Help to Buy ISA (except for the first month when you can open the account with up to £1,200). As a result, the most you’ll get from the government in the first year is £850, and £600 each year after that.
You can accrue more interest in the Lifetime ISA
If you opt for a Lifetime ISA, the government bonus will be paid into the account annually.
If you opt for the Help to Buy ISA, the government bonus won’t be paid into your account until you’re ready to purchase a property.
As a result, the Lifetime ISA gives you the oppotunity to earn interest not only on your own contributions, but also the government contributions too.
Not only that, since you can save more of your own money in the Lifetime ISA, you’ll obviously be earning interest on a larger sum of cash in the first place.
You can purchase a more expensive home with the Lifetime ISA
Those who purchase a home using the Help to Buy ISA can’t buy a home for more than £250,000 (or £450,000 in London.
However, if you save in a Lifetime ISA, you can purchase a home worth £450,000 anywhere.
If you want to start saving immediately, get a Help to Buy ISA
Since the Lifetime ISA doesn’t come into force until April 2017, if you’d like to start saving right away, get a Help to Buy ISA. When April 2017 comes around, you can either keep saving in a Help to Buy ISA or transfer your funds into a Lifetime ISA. You can have both ISAs at the same time if you wish, but you can only use the bonus from one towards your home.
If you can’t decide between saving for a house or a pension, the Lifetime ISA is best
If you’re able to save money each month but you’re not sure whether to save for a house or retirement, the Lifetime ISA is your best option out of the two. You could use the money for a house, a pension, or both.
[Many experts warn that the Lifetime ISA fails to beat workplace pensions when it comes to saving for retirement. More on this in another post!]
If you use money from The Lifetime ISA on something other than a house or pension, you’ll face a 5% charge
Sure, the Lifetime ISA is great for those struggling to choose between saving for a house or a pension, but what if you decide to spend the money on something completely different? Like a holiday, a new car, or an emergency expense?
- If you withdraw money from the Lifetime ISA for something other than a house or pension, you will face a 5% charge on the money you withdraw.
- If, however, you withdraw money from the Help to Buy ISA for something other than a house, you won’t face any charges.
In both circumstances, you’ll get to keep the interest you earnt but you won’t get the government bonus on the money you withdraw.
Since the Help to Buy ISA doesn’t charge you for withdrawing cash for other things, this could be the best option for you if you’d like to save money for a house but think you may change your mind. However, saving for retirement is important so at least if you get a Lifetime ISA, your money will go towards your pension if you decide not to buy a home.
You might also like: Why You Should Get A Help to Buy ISA Even If You Don’t Know Where You’ll Be In 5 Years.
Want to know more about the two ISAs? Take a look at my Lifetime ISA Guide and Help to Buy ISA Guide.
