City Survivors: Lifetime Isa versus the Help to Buy Isa or a workplace pension

Helen Knapman's picture

The sixth of this month sees the launch of the Lifetime Isa – dubbed the ‘Lisa’ (not to be confused with any friends or relatives also named Lisa).

This new addition to the tax-free Isa – individual savings account – family enables savers to pay in up to £4,000 a year until the age of 50 with the government adding a 25% bonus up to a maximum of £1,000 a year.

So save from the age of 18 (the minimum age) until 50, and you’d bag £32,000 for free – which certainly isn’t something to be sniffed at in today’s ultra-low savings rate environment. You can, however, only take out an Isa between the ages of 18 and 39. 

 

The government’s thinking is that the Lisa should be used for first-time buyers or pension savers. But, given we already have the Help to Buy (H2B) Isa, as well as a vast array of pension products, is the Lisa worth considering?

The answer to this largely depends on what you’d be using the account for. When it comes to saving for your first home, experts say Lisas beat H2B Isas. This is because while the H2B Isa also pays 25% on the amount you’ve saved, this is only up to a maximum bonus of £3,000. With the H2B Isa, you can also only pay in £200 a month, plus an initial £1,000 lump sum.

Darren Cornish, director of customer experience at investment platform The Share Centre, says: “If you plan to save for more than five years, the Lisa is more generous as you can pay in up to £4,000 a year, compared to £2,400 with the Help to Buy Isa.”

Tom Selby, senior analyst at investment platform AJ Bell, adds: “For people saving specifically for a deposit on a first home, the Lifetime Isa is almost certainly going to be the best option.”

But while you can earn a bigger bonus with the Lisa, as well as the potential to earn more as you can invest in stocks and shares as opposed to just cash as with the H2B Isa, the account is less flexible.

For example, there is a 25% charge on most withdrawals made from 6 April 2018 and the account also has to be open for a year before withdrawals can be made for your first home. The H2B Isa, in comparison, has no such withdrawal fees or waiting times for home purchases.

 

If you already have a H2B Isa, you can transfer savings into a Lisa or continue to save into both, but you can only use the bonus from one to buy your home. Mr Selby adds: “Transfers from a H2B Isa to a Lisa do not contribute towards the annual Lisa allowance and attract the same bonus. So investors could have up to £4,200 to transfer over, and then save £4,000 into their Lisa in the first year.

“The amount saved is therefore £8,200, which would attract a bonus at the end of the year of £2,050, resulting in £10,250 being invested in the Lisa in year one and setting the investor well on the way to their house deposit.”

But be warned that if your H2B Isa is more than £4,000, you’ll only be able to transfer your savings to a Lisa until 5 April 2018.

Danny Cox, chartered financial planner at platform Hargreaves Lansdown, adds: “If you’re going to buy a house in the very near future, you may want to continue with your H2B Isa.” 

When it comes to using a Lisa for pension savings, experts say there are better alternatives.

 

Mr Selby says: “The best option for saving for retirement will nearly always be a workplace pension, which most employed people will now have access to under auto-enrolment. This will benefit from employer contributions as well as a government top-up in the form of tax relief, and this has a significant impact on the value of the fund at age 65.

“Those without access to a workplace pension or who want to save more on top of that need to decide whether to use a Lisa or a Sipp [self-invested personal pension].”

Mr Cornish adds: “The Lisa should sit alongside a pension, be a great investing vehicle for a first home deposit or an additional stream of retirement income.”