‘Should swap my Help to Buy ISA for a Lifetime ISA instead?’

“I have an old Help to Buy ISA that I pay into every month. Should I transfer the money to a Lifetime ISA instead? Which is best?“

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A Help to Buy ISA is a tax-free way to save towards your first home. The scheme closed to new applicants in 2019, as the Lifetime ISA (LISA) was phased in, but many people like you, still have – and use – their account.

If you already have one, you can keep paying into your Help to Buy ISA until November 2029 – so there is no immediate pressure to act, and you can claim the 25% government bonus (see below) until November 2030.

Whether you should transfer to a LISA instead all depends on your future plans and how much you can afford to save.

Under the rules of the Help to Buy ISA, you can pay in up to £200 each month, or £2,440 a year, and the government will top your savings up by 25% when you buy your first home. That bonus is capped at £3,000, or 25% of £12,000. All in, a Help to Buy ISA can accumulate a value of £15,000 – or five years of maximum contributions with the bonus on top.

HMRC won’t pay this bonus directly into your account. You will get it when your conveyancer requests the funds from HMRC between exchange and completion. Unfortunately, this means the bonus can’t be used as part of the deposit.

A LISA, however, allows you to save for your first home or for retirement – so you have two options.

You can also pay in more – up to £4,000 each year – between the ages of 18 and 50 (you must make your first payment before you turn 40 though). You have the option to pay this in instalments or as a lump sum. 

The government will then add a 25% bonus to your savings, up to a maximum of £1,000 per tax year.

Switching from Help to Buy to a LISA may therefore be better for those who want more flexibility and can afford to make higher contributions.

Read more: Best cash ISAs accounts right now

Should you make the transfer?

Both schemes offer a 25% bonus on savings towards your first home, but there are some important differences to factor in if you are considering a transfer.

The main advantage of the LISA is that you can get a maximum government bonus of £33,000 if you contribute the maximum £4,000 from the ages of 18 to 50. 

That’s over ten times the amount you can get with a Help to Buy ISA, which offers a maximum of £3,000.

You will also get the LISA bonus monthly, whereas the Help to Buy bonus is only paid when you complete on a house purchase.

Meanwhile, a Help to Buy  ISA is only available as an interest-paying cash account, whereas a LISA can invest in stocks and shares as well as offering the cash option. Remember, though, putting your money in the markets also comes with an element of risk.

Help to Buy ISA limits

Another difference is that if you are buying a home outside London with a Help to Buy ISA, it must be £250,000 or less. If you are buying within the capital, there is a higher cap of £450,000.

The LISA has one purchase price cap of £450,000 regardless of where you are buying.

However, the big downside of the Lifetime ISA is that there is a 25% withdrawal penalty if you decide to take your cash for any reason other than you are buying your first home or you have turned 60. This penalty factors in the entire amount you are withdrawing and will wipe out your government bonus you have earned as well as 5% of the savings you put in.

There are pros and cons to both products, so you need to weigh these up to decide what’s best for you. 

You might want to stick with Help to Buy if you:

• Want to buy your first home within a year. This is because you have to wait a year before you can access the bonus in your Lifetime ISA. You can use the Help to Buy bonus as soon as you have saved at least £1,600.
• Are over the age of 40. You must be between 18 and 39 to open a LISA.
• Think you might change your mind about buying a home.
  You can withdraw the money from your Help to Buy ISA at any point. You won’t face any charges, but you won’t be paid the bonus. This is different to a LISA, which, as discussed above, comes with a withdrawal penalty.

You might want to move to a Lifetime ISA if you:

• Plan to buy a home outside London for more than the Help to Buy purchase limit of £250,000.
• Want to take advantage of higher interest rates. The interest on LISA cash accounts tends to be around 0.5% higher than on Help to Buy ISAs. Bear in mind too that there are also stocks and shares LISAs, which offer the potential for bigger returns.
• Are already a homeowner and want to save for your pension. The Lifetime ISA allows you to save for retirement too.
• Are not looking to buy your first home for at least a year. A LISA has to be open for a year before you can use it to buy a home.
• Want to put the money towards your deposit. The Help to Buy ISA bonus can’t be used until the day of completion on your property, meaning it’s unlikely that you would be able to put it towards your deposit (though there is a way around this, as we explain below). You receive the lifetime ISA bonus paid as you go along, so the money can be used towards a deposit.
• No monthly limit. The Help to Buy ISA allows you to save £200 per month, but the LISA maximum is £4,000 per year. That means if you get a lump sum, you can pay it in at any time and get the bonus within two months.
• You can’t have an investment Help to Buy ISA. You can open a cash LISA or a stocks and shares LISA, whereas Help to Buy ISAs are cash only.

A word of warning on transfers

Some providers don’t let you transfer money from a Help to Buy ISA to a LISA. If you’re looking to switch, make sure you check this before you sign up.

Those that do let you transfer have their own rules on whether you can switch some of the money from a Help to Buy ISA or whether you have to commit to moving all of it.

You can only contribute up to £4,000 to a Lifetime ISA in a tax year. If you have more than that in your Help to Buy ISA, you could transfer £4,000 now (providing you have that amount left in your £20,000 ISA allowance), but you would need to wait until the next tax year to move the rest of it.

If you are looking to switch, consider speaking to an independent financial adviser. They will be able to make a recommendation based on your personal circumstances.

How do I get access to my Help to Buy bonus?

The government will pay this bonus directly into your LISA, but the Help to Buy ISA, bonus must be requested.

Your conveyancing solicitor will need to request the funds from HMRC on your behalf once you start the buying paperwork.

You will need to tell the provider of  your ISA that you are ready to close the account. It will then send you a closing statement. Your solicitor will then be able to use this letter to request the bonus. The money will then be transferred to your solicitor.

Don’t wait until completion of the purchase as this will be too late. It’s also worth mentioning that if you simply withdraw the money, you won’t get the bonus.

Once your solicitor receives the government bonus, it will be added to the money you’re putting towards your first home. The bonus cannot be used for the deposit on exchange of contracts or to pay for solicitor fees.