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On 6th April, the Lifetime ISA (LISA) will be launched. It is for those looking to buy their first house and to encourage us to save for retirement. This is in addition to the Help to Buy ISA for the first time buyer, and the pension for retirement.

So, here’s a few of the major differences between the Help to Buy ISA and the new Lifetime ISA:

Help to Buy ISA Lifetime ISA
Who can have one? Anyone who is 16+ who has never owned a home Anyone aged over 18 and under 40, but once open you can contribute until age 50
What is it for? First house purchase First House purchase or for Retirement (access at age 60)
How much can I save? £1000 lump sum in the first month, plus £200 every month, so you can fund £1200 in the first month A maximum annual saving of £4,000
How long until I get my 25% bonus? Only when purchasing a house, but there must be a minimum of £1,600 in your account Added on annually
What is the maximum bonus? £3,000 assuming you have saved the maximum of £12,000 in your HTB ISA (+ accrued interest)

*It will take almost 5 years before you can save £12,000

£32,000 assuming you contribute £4,000 every year from age 18 to 50, giving you a total fund of £160,000  (+ accrued interest)
Can I access the money earlier? Yes, but you won’t get the bonus Yes, but you will pay an exit penalty of 5% plus repay any bonuses you have received.
What type of account is it? Cash only Cash or Stocks & Shares

What’s best for me?

It’s all well and good knowing the various features, but really you want to know what you should go for.

First Time Buyers:

It’s fairly straightforward, if you are a first time buyer and want to buy within the next year, you have to go for the Help to Buy ISA to get the bonus.

If you don’t think you will buy in the next year, go for the cash LISA as you can save more into it each year. You shouldn’t go for a stocks and shares LISA if you are going to use it for a house as you take the chance of it losing money. Only consider a S&S LISA if you don’t intend to buy a house for at least another 5 years or more.

Already a home owner:

If you’re not a first time buyer, you are only eligible for the Lifetime ISA. Your only advantage of using this over a normal ISA is to hold it until age 60 to keep the bonuses, so go for a stocks and shares LISA. Then it will be invested until you are aged 60 and you can benefit from compound interest. If it’s in cash, you’ve a very long time to be crushed by inflation, whereas an investment should beat inflation.

 

Is a Lifetime ISA a good thing?

In my own opinion, it’s a Help to Buy ISA: Version 2. You can save more into it which gives a bigger bonus, so that’s a good thing. If you are a first time buyer, then having either a Lifetime or Help to Buy ISA is almost certainly the thing to do. But what if you aren’t a first time buyer?

If you already own a house is there really much of an advantage? Unless you are able to save enough into a regular ISA alongside your Lifetime ISA, so that you never need access to it, then go for it. But how many people are in a position to be using the majority of their annual allowance, which will be £20,000? If you can, split £4,000 into LISA and £16,000 into ISA.

Personally, I don’t see much reason to open one unless you can afford to fund both. It might be worth opening one now so that you have the option of funding it up until age 50, but it would not be my priority to fund it first. The whole point of the ISA is that you can access it penalty free. The LISA could be fairly punishing to access early if you’ve funded it for even 10 years.

As a result of these penalties for withdrawing, many banks and investment providers won’t be launching their Lifetime ISA until the next tax year starting in April 2018.

It  also shouldn’t replace a pension, because your employer should also be contributing to it. Don’t give up the free employer contributions to fund a LISA over a pension. The access at 60 sounds good, but you can currently access a pension 10 years before state pension age, so that’s 55-58 depending on how old you are. The downside of pension is there will be tax to pay on access.

 

In my mind, the jury is out. It’s always good to have more products to encourage us to save, but I’m not sure if the Lifetime ISA will be flying off the shelves. Happy to hear other points of view, but I don’t think I’ll be rushing to open one.