For now, first-time buyers can open both Help to Buy and Lifetime Isas, but the latter can be used to boost retirement savings instead. We explain the basics, so you can weigh up what works best for you
Since the launch of the Help to Buy (H2B) Isa on 1 December 2015, it has helped 169,980 first-time buyers realise their dream of becoming homeowners. Some 225,618 bonuses have been paid, with an average value of £836, according to official data up to June 2018.
However, if you are thinking of opening an H2B Isa, you will have to act fast. You need to open your Isa by
30 November 2019 and can keep saving into it until 30 November 2029, but must claim your bonus by 1 December 2030.
How does a Help to Buy Isa work?
The concept is simple: if you are a first-time buyer aged 16 and over, you can put money into an H2B Isa and the government will boost your savings by 25%. For every £200 you save, you will receive a government bonus of £50 up to a maximum of £3,000 on a savings pot of £12,000. The minimum bonus is £400, so you must save at least £1,600. To boost your savings, you can deposit a lump sum of up to £1,200 in the first month after opening this Isa.
However, there are drawbacks: the purchase price of the property cannot be more than £250,000 (or £450,000 in London) and it must be the only property you own. The bonus will only be paid towards completing your property transaction, not towards a deposit.
If you have already paid into a Cash Isa, you will have to transfer it to open an H2B Isa. Savings over £1,200 can be moved into other types of Isa or savings accounts. However, some providers – Nationwide and Virgin Money, for example – allow you to have a ‘split Isa’ to include a Cash and H2B Isa in one wrapper. H2B Isas are available through several banks, building societies and credit unions, with interest rates higher than for other types of savings accounts. At the time of writing, you can get a top rate of 2.8% at Darlington Building Society at one of its 10 branches. Meanwhile, Barclays offers the best open-to-all rate at 2.58%, followed by Buckinghamshire Building Society and Virgin Money, both with rates of 2.5%.
Visit Helptobuy.gov.uk/help-to-buy-isa for more information.
How does a Lifetime Isa work?
Launched in April 2017 and with 166,000 accounts opened in its first year, the Lifetime Isa (Lisa) offers a more generous bonus. It is available to savers aged between 18 and 39 and allows a maximum contribution of £4,000 a year with a government bonus of up to 25%. You can add to your Lisa – and receive the bonus – until you turn 50 when your savings will continue to earn interest or investment returns.
You can hold cash or stocks and shares in your Lisa or have a combination of both, up to the maximum Isa allowance of £20,000 for the 2019/20 tax year.
You can withdraw your money tax-free to put towards a first home worth £450,000 or less or you can access your cash once you are aged 60 or over, or if you become terminally ill. However, if you withdraw your money at any other time, the government will levy a 25% exit penalty – so you could get back less than you paid in.
Another drawback is that first-time buyers cannot access their savings or the bonus until their Lisa has been open for a year.
At the time of writing, there are three cash providers. Newcastle Building Society offers the top cash rate at 1.1% AER, while Skipton Building Society and Nottingham Building Society both offer interest of 1% – though you have to sign up in a branch for Nottingham’s Lisa.
There are more Stocks and Shares Lisa providers with varying fees and annual management charges. These include AJ Bell, Hargreaves Lansdown, Nutmeg and The Share Centre.
If you have an H2B Isa and a Lisa, you can only use the bonus from one of them. You can transfer money from an H2B Isa to a Lisa for free. Move your cash out of the Lisa, and you will pay the 25% penalty. Visit Gov.uk/lifetime-isa for more details.
LIFETIME CASH ISA VERSUS HELP TO BUY ISA
| Annual allowance | Government bonus | Maximum bonus | Wthdrawal penalty | Age restrictions | Maximum property purchase price | Top open-to-all accounts | |
|---|---|---|---|---|---|---|---|
| Help to Buy Isa | £3,400 in first year, £2,400 thereafter | 25% | £3,000 | None | 16 and over | £250,000 or £450,000 in London | Barclays - 2.58% |
| Lifetime Cash Isa | £4,000 | 25% | £32,000 | 25% (up to age 60) | Must be aged 18 to 39 to open | £450,000 | Newcastle Building Society - 1.1% |
Source: Moneywise, 15 February 2019
Which should you choose?
Tom Adams, head of research at savings site Savings Champion, says: “For first-time buyers, both the H2B Isa and the Lisa offer a generous bonus. You could use the H2B Isa for your first home and keep your Lisa until you are 60 or over and use the bonus from this to supplement your retirement income.
“The Lisa offers a better proposition for some, as the annual allowance is greater and the bonus is added each month, which means that it will benefit from compounded income or growth. In addition, the maximum price of the property that can be bought is £450,000, regardless of where it is. On the face of it, the Lisa is more generous as larger amounts can be deposited and the potential bonus is greater.”
However, recent research from AJ Bell found that one in five respondents don’t understand how the 25% exit fee works.
Tom Selby, senior analyst at A J Bell, told Moneywise: “The exit penalty remains a really unwelcome feature of the Lisa. If the government abolished it, the product would be simpler to understand, more flexible and more attractive to savers.
But he thinks that a Stocks and Shares Lisa has the edge over the H2B Isa.
“With an Investment Lisa, you get your bonus added to your fund monthly so it has the opportunity to grow. The contribution limits are much higher, meaning savers who can afford to can benefit from a much bigger bonus. While many prospective first-time buyers will struggle to save £4,000, whatever they can afford is worthwhile given it is boosted by 25%,” he explains.
Mr Selby says that a workplace pension should be the first port of call for retirement income as this comes with tax relief – which is at least equal to the 25% offered by a Lisa – and a matched employer contribution, but he suggests that the Lisa is a good haven for any extra contributions.
“Basic-rate taxpayers might want to consider a Lisa as the bonus is exactly the same as a pension and 100% of withdrawals are tax-free from age 60 (versus 25% tax-free from a pension at 55).
“Higher- and additional-rate taxpayers will probably be better off in a pension because they get a bigger savings bonus, although a Lisa could be useful for those who are lucky enough to be pushing up against the pensions annual allowance limit,” he says.
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Source Moneywise https://ift.tt/2UhAya1
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