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Battle of the ISAs: Lifetime vs Help to Buy

02 July 2016

Savers face myriad ISA options, and here we pitch two of them head-to head

Man and woman working at desk

Providing the Lifetime ISA is implemented as we expect, then from April 2017 first-time buyers will have a choice of the Help to Buy ISA and Lifetime ISA. This raises the question, what are the differences between the two and which will enable first-time buyers to maximise their deposit? Let’s look at a couple of examples.

NECK AND NECK

In April 2017, Justin is 20 years old and plans to save £150 every month for the next five years.

The government bonus under both the Help to Buy ISA and Lifetime ISA is 25%. Justin, therefore, accumulates the same level of bonus under both types of ISA.

Unlike the Help to Buy ISA, where the government bonus is paid when the house purchase is made, the bonus under a Lifetime ISA is expected to be paid annually.

In relation to the Help to Buy ISA only, Justin could have made a one-off £1,000 contribution when the account was opened.

If Justin misses a monthly payment into the Help to Buy ISA, he cannot then make it up in a subsequent month (even in the same tax year). This is in contrast to the Lifetime ISA, where the annual contribution limit of £4,000 can be met over the course of the tax year with no monthly cap.

   Help to Buy ISA Lifetime ISA 
Tax Year  Contribution Government bonus Contribution
Government bonus
2017/18 £1,800 £1,800 £450
2018/19
£1,800
£1,800 £450
2018/20
£1,800   - £1,800 £450
2020/21
£1,800   - £1,800 £450
2021/22
£1,800   - £1,800 £450
  £9,000 £2,250 £9,000 £2,250
  £11,250 £11,250

LIFETIME TAKES LEAD

In April 2017, Rachel is 23 years old and decides to save £300 every month for six years.

Rachel is unable to contribute £300 per month into the Help to Buy ISA as contributions are capped at a maximum of £200 per month. She could, of course, contribute £200 per month into a Help to Buy ISA and a further £100 into another asset – not another cash ISA, but it could be a stocks and shares ISA.

Rachel will not receive a 25% bonus on her total contributions under the Help to Buy ISA as the maximum bonus is capped at £3,000.

In contrast, a bonus of up to £1,000 per year for 32 years can be accumulated under the Lifetime ISA.

Even though Rachel utilises the one-off £1,000 contribution when the Help to Buy ISA is opened, she is still able to accumulate a larger pot in a Lifetime ISA.

Rachel could set up a Help to Buy ISA before April 2017 and once the Lifetime ISA is introduced she could then transfer her accumulated savings (including the earmarked bonus) into a Lifetime ISA. However, this opportunity to transfer will only be possible in the 2017/18 tax year.

   Help to Buy ISA Lifetime ISA 
Tax Year  Contribution Government bonus Contribution
Government bonus
2017/18 £3,400 £3,600 £900
2018/19
£2,400
£3,600 £900
2018/20
£2,400  - £3,600 £900
2020/21 £2,400  - £3,600 £900
2021/22 £2,400   £3,600 £900
2017/18 £2,400  - £3,600 £900
  £15,400 £3,000 £21,600 £5,400
  £18,400 £11,250

INTERESTING COMPARISON

Let’s consider the impact of interest on Justin and Rachel’s investments. We’ll assume interest is payable annually in arrears at 4%.

For Justin, the Help to Buy and Lifetime ISA came out neck and neck. But with the Lifetime ISA bonus payable each year, instead of being added when he buys the property, he’ll earn interest on this as well. He could earn £187 more in interest from a Lifetime ISA, giving him £12,576 for his deposit compared to £12,389 from a Help to Buy ISA.

For Rachel, she can save more into a Lifetime ISA and can therefore accumulate a larger government bonus than she could with a Help to Buy ISA. She could also earn an extra £1,382 in interest; £3,803 from a Lifetime ISA compared to £2,421 from a Help to Buy ISA, giving her a deposit of £30,803.

Whilst this highlights the effect of interest payable from a deposit type account, qualifying investment into a Lifetime ISA will be the same as for a Cash ISA and a Stocks and Shares ISA.