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Which is best a LISA or Help to Buy ISA?

LISA or Help to Buy ISA?

Both are designed to help you buy your first home and give you a 25% bonus on your savings subject to limits; the main difference is that you can save £4,000 a year in a Lifetime ISA, compared to £2,400 in a Help to Buy ISA. This could mean a much bigger and quicker bonus.

What is a Lifetime ISA (LISA)?

An ISA (Individual Savings Account) is simply a type of savings plan with tax benefits (A comparison of ISA’s v Pensions can be found here).

A LISA is a special ISA for people aged between 18 and 40 that can only be used to buy a first house or as a pension, otherwise withdrawals have penalties. You can pay up to £4,000 into a LISA each year up to the age of 50 and the government will give you a 25% bonus i.e. up to £1,000! The 25% bonus is paid monthly, plus you earn interest on whatever you save - including on the bonus, and as it's an ISA, that interest is tax-free. No brainer if you are buying a house!

You need to have had the LISA open for at least 12 months to be able to use it (and the bonus) towards your first home. You can withdraw money at any time to buy a house without any penalties. You can withdraw money at any time after the age of 60 without any penalties and free of income tax unlike a pension, but if you withdraw before the age of 60, not for a house purchase, there is a 25% charge; the rules are the same for partial and full withdrawals.

At first glance, the fact you have had a 25% bonus added, then a 25% penalty would seem to leave you back where you started - unfortunately the math’s doesn't work like that.

Imagine you saved £1,000 and got a £250 bonus, but then decided to withdraw that £1,250 total. The 25% penalty would be £312.50, so you would only get back £937.50.

In effect, the math’s means that withdrawing for reasons other than buying your first home or retirement loses you 6.25% of what you contributed.

Withdrawals are free of penalty if you are transferring a LISA to another provider or you are terminally ill with less than 12 months to live.

What is a Help to Buy ISA (H2BISA)?

The H2BISA was the forerunner to the LISA; you can no longer open a new H2BISA. If you already have one you can save into it until 30 November 2029, with a further 12 months to claim the bonus.

You can save up to £2,400 a year in a H2BISA (£3,400 in year one) and the government adds 25% to your savings, for a maximum bonus of £3,000. So, after saving a total of £12,000, any additional savings will not gain any bonus. The bonus is paid on buying a home and funds are available on completion.

If withdrawing for any reason other than buying your first home, there are no government charges but also no bonus is paid.

You can use the H2BISA once you have £1,600+ saved.

Can I have both?

You can have a H2BISA and a LISA at the same time, and pay into both accounts in the same tax year, but you can only use the bonus from one of them towards buying a home. You could use the H2BISA bonus for a home and then use the LISA and its bonuses for retirement; but if you use the LISA to buy a home, you will not get the H2BISA bonus - you can still keep it and use the money plus the interest.

The maximum annual ISA limit per person for tax year 2022/23 is £20,000. This means that you can have a LISA alongside a H2BISA, a cash ISA, a stocks & shares ISA, and an innovative finance ISA to a maximum annual savings amount of £20,000, but the maximum amount you can pay into the LISA each year is £4,000 and into a H2BISA is £2,400.

You can transfer your H2BISA or LISA from your current provider if the alternative provider offers the equivalent ISA and accepts transfers in. You can also transfer the money in your H2BISA to a LISA – although this would count towards the maximum amount of £4,000 that can be put in during one tax year.

If you have a H2BISA and you transfer it into a LISA, the amount you transfer will qualify for the government 25% bonus.

You can hold more than one LISA at any one time, provided that you only pay into one in each tax year.

If you have a H2BISA or LISA and you are buying with someone else who also has one, you can both get the bonuses when you buy.

What are the main differences?

The main difference is that you can save £4,000 a year in a LISA compared with £2,400 in a H2BISA, and the H2BISA bonus maxes out at £3000 (four years and eight months assuming max contribution), whereas the LISA bonus can be up to £33,000 (assumes max contribution every year from age 18-49).

One of the other main differences is how and when the bonus is paid. The LISA bonus is paid monthly, while the bonus on the H2BISA must be claimed when buying the house. This means that with the LISA you can take advantage of The Magic of Compound Interest (find out more here).

A LISA can be used for investing in Equity (Stocks and Shares) as well as cash, but a H2BISA can only be used for cash savings – you can find out more about investing here and here.

For buying a house use a savings LISA - short-term saving, lower potential returns but less volatility. For pension saving use an Investment LISA - longer-term saving, higher potential returns but greater volatility; plus any investment gains (dividends, capital gains and bond interest) you might pay tax on these outside a LISA, but within a stocks & shares LISA you don't pay tax on any of them.

The main drawback of the LISA comes if you draw the money out before the age of 60 for anything other than buying your first property, which would mean you would have to pay a penalty as illustrated earlier. If you are not buying a home, you can withdraw money at any time from a H2BISA, you just don't get the bonus.

You can use a H2BISA to buy a home worth up to £250,000, or up to £450,000 in London. You can use a LISA to buy a home worth up to £450,000 anywhere in the country.

You can pay a lump sum into a LISA, but only pay monthly into the H2BISA.

The LISA can be used for a home deposit and mortgage deposit, but the H2BISA can only be used for the mortgage deposit.

You need to have had the LISA open for at least 12 months to be able to use it (and the bonus) towards your first home; you can use the H2BISA once you have £1,600+ saved.

Which is best a LISA or Help to Buy ISA?

There are benefits to both, so whether you stick or switch depends on which of the advantages will work in your favour.

If you are looking at a first home valued at more than £250,000 outside of London, you will definitely want a LISA. You can make more money with a LISA than with a H2BISA, and the bonus is added to the LISA on a monthly basis so can benefit from compound interest. Plus, you can invest in stocks and shares with a LISA.

If you don’t think you will hit the maximum limits/benefits of saving into a H2BISA before you buy a house, then stick with it, as you can get money out at any time for emergencies without penalty. Do not switch a H2BISA to a new LISA if you want to buy within a year, and if you are over 40 you can’t move to a LISA. Don’t forget that if you do switch money from a H2BISA to a LISA, this will use some or all of your annual allowance.

You can have both at the same time, as can your partner, so you can formulate a plan which suites you best!


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