Since November 2019 the government’s Help to Buy (HTB) ISA scheme has been closed to new applicants, yet those who opened the ISA before this time can continue to use it until 2030.
The Lifetime ISA, however, is still available for applicants between the ages of 18-39 to open.
Though you can still have both ISAs open, many firms have started recommending that those with the older HTB ISAs open the current Lifetime ISA and transfer their savings across.
What are HTB and Lifetime ISAs?
The HTB and Lifetime ISAs are special savings accounts designed to help people save up money for a significant life event. In the case of HTB, this is buying your first home. The Lifetime ISA is designed for either First Time Buying or retirement. Both ISAs will allow you to receive a bonus from the government on top of any savings you pay into them. The Lifetime ISA gives you a monthly bonus of 25% of whatever you pay in (up to a maximum of £4,000 each year), and the HTB ISA gives the same bonus which can be claimed upon completion of your house purchase.
As the Lifetime ISA is now the only one available to open, if you do not have a HTB ISA you should look into
what a Lifetime ISA is. However, if you opened a HTB ISA before November 2019, you may be wondering whether it’s worth moving those funds into the Lifetime ISA, as some suggest.
We’ve weighed up the pros and cons of this action, but remember you MUST also speak to a qualified, regulated independent financial advisor, who can recommend what's best for your circumstances.
Advantages of switching from a HTB to Lifetime.
Save more money: The maximum amount you can pay into a HTB ISA in a given year is £2,440, whereas the Lifetime ISA’s yearly limit is £4,000. Switching from HTB to Lifetime could therefore allow you to pay in more savings, ideal for those who can afford to pay more in.
No monthly limit: The HTB ISA only allows you to save £200 per month, but the Lifetime ISA maximum is £4,000 per year. That means if you get a bonus or a lump sum, you can put that in at any time.
Larger property price: While both ISAs have limits on the cost of the property you can buy using them, the Lifetime ISA allows you to buy a property up to £450,000, as opposed to the HTB ISA’s £250,000 limit (although the HTB limit is £450,000 if you’re buying a property in London – see below). This makes the Lifetime ISA preferable for anyone looking for a more expensive first home outside of London.
Bonus accessible pre-completion: The HTB ISA bonus can’t be accessed until the day of completion on your property, meaning it can be more difficult to use towards your deposit amount rather than towards your mortgage payment, or for expenses like furniture. If you want to use it for your deposit, the legal company will agree a 5% deposit, but will only send the cash on exchange available. If something happens and the sale falls through, you will still owe the full 5% deposit, but fortunately that's rare. The Lifetime ISA gives you access to the bonus before completion, so you can use the savings and bonus for your deposit with more ease.
Bonus payments: While both ISAs give you a 25% bonus on top of whatever you pay in, the timings for these bonuses are different. The bonus for the Lifetime ISA is paid in monthly, whereas you can only claim the bonus for the HTB ISA on completion of your home purchase. This means the Lifetime ISA bonus can be used and accessed earlier in the home buying process.
Investment options: With a HTB ISA you can only save your money in cash. However, with a Lifetime ISA you have the option of saving in cash or investing in stocks and shares. Investing in stocks and shares may provide you with a better return if you’re likely to hold your investments for a number of years and you are comfortable with the additional risks involved.
Cannot use both: Though both ISAs are designed to help First Time Buyers purchase their first property, you cannot combine funds from both to do this, you must use one or the other. For this reason, having both a HTB and a Lifetime ISA open for the purpose of First Time Buying could be a waste of time, so it may be worth consolidating them.
Disadvantage of switching from a HTB to Lifetime.
Use up max pay in: As you know both the HTB and Lifetime ISA have a yearly limit to how much money you can pay into the account. However, when you transfer money from another ISA, such as HTB, into the Lifetime ISA, it takes away from the yearly limit, restricting how much more you can save in a year. For example, if you transfer your existing £4,000 in, you cannot pay any more in for the rest of the year, meaning you have essentially lost a year of saving. However, that doesn't stop you saving and putting more in the next year or saving money towards your moving costs.
Access delay: Unlike a HTB ISA, which can be accessed as soon as it has saved £1,600, a Lifetime ISA cannot be accessed until you have had it for 12 months. This means that if your time frame for buying your first home is sooner, it will not be much help to you.
London property price: In most areas of the UK, the property price you can afford to buy with a Lifetime ISA is higher than that of a HTB, £450,000 VS £250,000. However, if you are looking to buy a property in London, the max price from a HTB ISA goes up to £450,000, exactly the same as the Lifetime ISA, negating that benefit of switching from one to the other.
Cannot use both: Though we stated before that not being able to use both HTB and Lifetime ISAs for FTB was an advantage of merging the two funds, this really does depend on your circumstances. Remember that a Lifetime ISA is not reserved exclusively for First Time Buyers, but can be kept until the age of 60 to save for a retirement nest egg. So, if you have both a HTB and Lifetime ISA open, you might want to use the HTB ISA to purchase your first home and leave the Lifetime ISA alone to save for your retirement.
Withdrawal charges: Though both ISAs encourage you to only withdraw money when using them for their purpose of First Time buying (or retirement in Lifetime’s case), the HTB does not come with withdrawal charges if you take money out at the wrong time, whereas the Lifetime ISA does. This charge is currently 20%, although will be 25% from 6 April 2021. However, this withdrawal charge is effectively the refund of the government bonus, whereas with HTB the bonus wouldn’t have been paid at this stage anyway.
Whether to transfer from HTB to a Lifetime ISA is ultimately going to be a decision that will come down to your individual circumstances and what you are hoping to get out of your savings. Whether or not you are having trouble coming to a decision, it is important for you to seek advice from an Independent Financial Advisor before going forward.