Help to Buy vs Lifetime ISA

isa  individual savings account ...
isa individual savings account ...

Politicians are constantly proving they shouldn't be in charge of financial innovation. Take George Osborne's exciting new range of ISAs for example. First he created the Help to Buy ISA - a clever new ISA for people saving for a house deposit. This was very popular, and more than 500,000 people took one out.

In fact, it was so popular, that soon afterwards he created the Lifetime ISA - a clever new ISA for people saving for a house deposit (or for retirement). Now buyers don't have one simple new product: as of 6 April this year, they will have a confusing choice between two ISAs that are technically designed to do the same thing - so which should they opt for?

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See also: Should you use your ISA allowance or wait for the new LISA?

If you have a Help to Buy ISA, there are a number of convincing reasons to transfer to a LISA. First, it will enable people to save more (up to £4,000 a year instead of £200 a month with the Help to Buy ISA (with the exception of the first month when you can save £1,200)).

The Lifetime ISA also offers flexibility over how you put money away, so you can stick with monthly payments - or a lump sum (or a combination of the two).

Better bonus

The Lifetime ISA will also offer a greater potential bonus. With both the Help to Buy ISA and the Lifetime ISA, the government adds 25% to your savings. However, because you can put more into a Lifetime ISA, you can get more of a bonus

Danny Cox, a chartered financial planner from Hargreaves Lansdown points out that you'll get your bonus earlier too. With Help to Buy, you'll get 25% of the closing balance of your account at the time when you buy the property. The Lifetime ISA, meanwhile, pays 25% as you save and invest. This is initially paid annually, and eventually monthly.

More flexible

The Lifetime ISA also allows more flexibility in terms of investment. The Help to Buy ISA only lets you put your money in cash, whereas the Lifetime ISA allows you to choose between cash or stocks and shares. Over the short term, the fluctuations of the stockmarket mean stocks and shares may be inappropriate, but if you are expecting to invest for five or ten years, then you can consider stocks and shares investments.

It's also more flexible in how you use it for a house deposit - which makes it more functional. The Help to Buy ISA won't pay the government bonus until the house purchase is complete - so you cannot use the bonus as part of the deposit. The Lifetime ISA, however, allows 90 days between withdrawal and completion - so you can use the government bonus as part of the deposit.

The Lifetime ISA can also be used to buy a more expensive first home - worth up to £450,000 - whereas the Help to Buy is capped at £250,000 outside London (£450,000 in London).

In fact, there is only one situation in which Cox says it's not a good idea to transfer - if you plan to buy a property before April 2018. The Lifetime ISA needs to be in force for a full 12 months before any bonus is paid, so if you plan to buy within the next 12 months you should stick with the Help to Buy ISA - because it's the only way to get a bonus on your ISA savings.

How transferring works

If you choose to transfer the Help to Buy ISA over, it won't affect your Lifetime ISA allowance for the year. Your Help to Buy ISA will be valued on 5 April 2017, and you can transfer this value (plus any additional interest) at any point in the 2017/2018 tax year. As long as you transfer by 5 April 2018, it won't count towards your Lifetime ISA allowance, but you will get the 25% government bonus on the transfer value.