How an Isa can help you buy your first home

How do Lifetime Isas work – and should you transfer your Help to Buy Isa to one?

Help to Buy (H2B) Isas are now closed to new applicants, leaving Lifetime Isas (Lisas) the only option for savers looking for help to buy a property.

So how do Lisas work – and should you transfer your HTB Isa to one?

Latest figures show about 300,000 people have opened a Lisa since they were launched in April 2017.

The Lisa superseded the Help to Buy (H2B) Isa, which has been around since 2015.

Up until 30 November 2019 it was possible to open both types of account, but it is no longer possible to open a new H2B Isa.

How does a Lisa work?

Both the H2B Isa and Lisa offer free cash to first-time property buyers, but the Lisa has a much more generous bonus structure. It allows a maximum annual contribution of £4,000 with a government bonus of 25% – that is up to £1,000 of free money each year.

You need to be aged between 18 and 39 to open a Lisa but you can add to it – and receive the bonus – until you turn 50. After that, you cannot make any further contributions. However, your savings will continue to earn interest or investment returns.

If you made the maximum contribution each year from the age of 18 to 50, you would receive a total bonus of £32,000. In comparison, the maximum bonus with a H2B Isa is just £3,000.

You can hold cash or stocks and shares in your Lisa, or have a combination of both, up to the £4,000 subscription allowance. In turn, this counts toward the overall Isa subscription limit of £20,000 for the 2020/21 tax year.

You can withdraw the money in a Lisa to put towards a first home with a purchase price of £450,000 or less. Although you can only hold one Lisa, if you are buying a property with someone else you can both receive and use the bonus.

Alternatively, you can access the cash in a Lisa 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 – so if you are planning to buy a property in the next 12 months, a Lisa will not be of any use to you. 

At the time of writing Moneybox offers the top cash Lisa rate of 1.25% AER, as does Nottingham Building Society, while Paragon Bank offers 1.15%.

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 when you buy a home. You can transfer money from an H2B Isa to a Lisa for free.

Visit Gov.uk/lifetime-isa for more details.

How does an H2B Isa work?

Available to first-time buyers aged over 16, the cash savings accounts offer a government bonus of 25% on contributions. The maximum bonus that can be claimed is £3,000 on a savings pot of £12,000. To get any bonus at all, savers need to save a minimum of £1,600 (to get a £400 bonus).

Although H2B Isas offer a boost to first-time buyers, there are a few drawbacks. First, the purchase price of the property cannot be more than £250,000 (or £450,000 in London). Controversially, the bonus is only paid when you complete your property transaction – not when you hand over your deposit. 

According to latest government figures, since the scheme’s launch in December 2015, 256,564 homes have been bought with H2B help and almost 340,000 government bonuses handed out.

H2B Isas closed for new applicants on 30 November 2019, but existing savers can keep saving into their accounts until 30 November 2029 – the bonus must be claimed by 1 December 2030.

Should H2B Isa holders switch to a Lisa?

If you are a potential first-time buyer, opening a Lisa is now your only option. But if you already have a H2B Isa, you might be wondering if you should also open a Lisa and fund both accounts or transfer cash held in your H2B Isa to your Lisa.

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.”

Bear in mind, however, that if you’re aged 40 or over, sticking with an existing H2B Isa is your only option.

Another issue with the Lisa is the 25% exit fee if you don’t use it to buy your first home or fund your retirement.

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 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 that it is boosted by 25%,” he explains.

To protect the tax-free status of your money, you will need to arrange this with the Lisa provider you want to switch to before closing your H2B Isa. The amount transferred in will count against the £4,000 Lisa maximum annual contribution. So if you transfer in £1,000 after 6 April 2020, you will only be able to put £3,000 into your Lisa for the tax year 2020-21.

Should I use a Lisa for retirement savings?

Mr Selby says that a workplace pension should be the first port of call for retirement income as this comes with tax relief and a matched employer contribution, but he suggests that the Lisa is a good haven for 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.