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Forget the Help to Buy ISA! The Lifetime ISA gives you up to £32,000 for free

Harvey Jones
A person holding onto a fan of twenty pound notes

Free cash from the government? That sounds too good to be true, but it isn’t. The Help to Buy ISA has been helping first-time buyers get on the property ladder since 2015, by giving them a 25% bonus on top of money saved in the scheme.

The downside is it closes today. Don’t despair though, because its replacement, the Lifetime ISA, could ultimately prove to be a lot more generous. You don’t even have to use the money for a property deposit, but could let it roll on for retirement instead.

Lifetime opportunity

The Help to Buy ISA was a roaring success, with more than a million accounts taken out since launch in December 2015, helping more than 234,000 first-time buyers get on the property ladder. Existing accounts can run to 2030.

The Lifetime ISA, or LISA, was launched in April 2017, has been less popular, with many torn between the two schemes, and confused by the varying rules.

Life is simpler now the Lifetime ISA is the only government top-up on the table. You can open one between ages 18-39, and claim a 25% bonus on the money you pay in. Maximum annual contribution is £4,000, which gives you a bonus worth £1,000 a year.

Big money

Once you have started, you can continue making contributions to age 50. Someone who opened a Lifetime ISA on their 18th birthday, and contributed the maximum £4,000 every single year, could claim a total bonus of £32,000, assuming rules stay as they are. Plus you will get growth and income on top. You could have £149,000 at age 50.

By contrast, the maximum you could save in a Help to Buy ISA was £12,000, giving you a far smaller maximum bonus of £3,000.

You have to hold the Lifetime ISA for a year before using the money to buy your first home. Thereafter you can put it towards properties up to £450,000, but only if you have never owned one before. This includes a part share of an inherited property inside or outside the UK, or an investment property.

You could save the money for retirement instead. If you do that, you cannot touch your pot until age 60. If you withdraw the money before then for any reason other than to buy your first home, you face a stinging exit penalty of 25% on all the money. You could get back less than you put in.

More than 1,500 savers paid £1m in penalties for early withdrawals in just two years. That’s £695 each.

Know the rules

The Lifetime ISA comes as part of your overall £20,000 ISA allowance, rather than on top, with all income, gains and withdrawals free of tax.

Long-term investors should place their money into stocks and shares, with this option on offer from wealth platforms AJ Bell, Hargreaves Lansdown, MoneyBox, Nutmeg and The Share Centre.

Higher rate taxpayers may prefer to invest in a self-invested personal pension (SIPP), as they can claim tax relief at a higher rate of 40% or 45%, and access their money from age 55. Also, you can invest up to 100% of your annual salary, or £40,000, whichever is lower.

Free money from the government is never to be sneezed at, however it comes.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019