The new Lifetime ISA will give you a 25% tax free boost from the government at the end of each tax year. We look at whether this gives the product the edge over the Help to Buy ISA when saving to buy a first home.
Individuals have been able to open Lifetime ISAs since April 2017 but it is only now that they are available from a reasonable number of providers. You may be wondering whether they are right for you or, if not you, your children.
Key features of the Lifetime ISA
Adults below the age of 40 can open a Lifetime ISA account and pay in up to £4,000 per year. At the end of each tax year, account holders will receive a 25% bonus from the government.
If the full £4,000 is invested, the maximum you can pay into other types of ISA falls to £16,000. Funds, including the amount provided from the government in bonuses, can be used to buy a first home up to £450,000 at any time from one year after the first subscription. Alternatively, the full amount can be withdrawn completely tax-free from age 60.
So, would you be better off using the Lifetime ISA or the Help to Buy ISA as an investment vehicle to fund the purchase of a first home?
Key features of the Help to Buy ISA
Help to Buy ISAs were first introduced in 2015. The government also provides an incentive to savers who use this type of ISA as a way to save for a first home. Each person who has saved into a Help to Buy ISA at the point the purchase of their first home is completed will receive a tax-free government bonus.
The maximum bonus – for £12,000 of savings – is £3,000. Savers can not invest more than £3,400 into the Help to Buy ISA in the first year. The limits are £1,200 in month one followed by 11 monthly payments of £200. To qualify for the bonus, you must have saved at least £1,600. The bonus is available on purchases of homes worth up to £250,000 (£450,000 in London).
Which type of ISA should you choose?
The Help to Buy ISA is a type of cash ISA and individuals can only open one cash ISA in each tax year. To get around this problem, and enable savers to save larger amounts tax-fee, some providers will bundle a Help to Buy ISA and a Cash ISA together.
You can save into a Help to Buy and a Lifetime ISA at the same time but you will only be able to use the bonus from one of the accounts to fund the purchase of your first home.
If you plan to buy your home further into the future, the Lifetime ISA will give you a better return in terms of bonuses. The bonuses are higher and are also received after the end of each tax year. This gives you more opportunity to boost investment returns.