• Moneybox launches market-leading cash Lifetime ISA
• Rates still far behind Help to Buy ISA
Laura Suter, personal finance analyst at investment platform AJ Bell, comments on the launch of Moneybox’s new cash Lifetime ISA:
“Finally we are starting to see something that looks like competition in the cash Lifetime ISA market, which has been sluggish since launch. There has been a dearth of providers in the market, meaning those that entered the space didn’t have to compete much on rates to draw in new savers.
“The launch of Moneybox’s new cash Lifetime ISA paying 1.4% is a decent amount more than the current top rate of 1.1%. It means someone saving the full £4,000 a year will end up with £14 more interest in a year, after the 25% Government bonus has been added. This isn’t going to contribute much more to the average house deposit, but we’ve come a long way since the launch of the first cash Lifetime ISA from Skipton, which paid just 0.5% in interest.
“However, it still looks measly in comparison to the top-paying widely offered Help to Buy ISA rate of 2.58% from Barclays. The launch takes the number of cash Lifetime ISA providers up to four, compared to 27 Help to Buy ISA providers, showing the effect that more providers in the market could have on rates.
“A recent AJ Bell Freedom of Information request revealed that 286,000 Lifetime ISA accounts have been opened since the savings product launched, despite the small number of providers offering the product. With the end of the Help to Buy ISA looming in the next few months – after 30th November this year no-one can open a new account – we would hope that more banks and building societies will enter the market and drive up competition, and rates for savers.”
Help to Buy ISA vs Lifetime ISA:
With the Lifetime ISA you can get more free money – Both the Help to Buy ISA and Lifetime ISA get the same 25% Government bonus, but with the Help to Buy ISA this is limited to the first £12,000 saved – meaning a maximum bonus of £3,000. With the Lifetime ISA you can get up to £1,000 a year in Government bonus, up until the age of 50. If you opened a Lifetime ISA at age 18, that is a maximum Government bonus of £32,000 (or £33,000 if you’re lucky enough to have your 18th birthday before 6th April).
You can save a larger amount in the Lifetime ISA – You can save up to £4,000 a year into the Lifetime ISA, compared to the Help to Buy ISA where you can save up to £200 a month, plus an extra £1,200 in the first month of opening the account.
Need to buy in 12 months? Use a Help to Buy ISA – You must have the Lifetime ISA open for 12 months before you can use the money to buy your first home. This means if you plan to buy in the next year, you should use a Help to Buy ISA, which doesn’t have this restriction.
You can invest a lump sum in a Lifetime ISA, but only save monthly into a Help to Buy ISA – With the Help to Buy ISA you are limited to saving £200 a month and if you miss a month, you cannot pay double in the next month. With the Lifetime ISA you can contribute up to £4,000 a year, in one or more lump sums or as a regular monthly saving.
Help to Buy ISA cash rates are higher – If you want to save into cash you’ll get a higher interest rate with the Help to Buy ISA. The best Help to Buy ISA cash rate is currently 3% from Penrith Building Society, although it’s only available to residents of Cumbria – the highest nationwide rate is 2.58% from Barclays. In comparison, the highest Lifetime ISA cash rate is 1.4% from Moneybox. However, the higher annual limit of the Lifetime ISA, and so higher Government bonus, wipes some of this advantage out.
Cash Lifetime ISA: At 1.4% interest, on the maximum £4,000 saved, you’d end up with £5,070 with the Government bonus on the Lifetime ISA after one year, with interest and the Government bonus – a £1,070 increase.
At 2.58% interest on the maximum £2,400 saved with a Help to Buy ISA, you’d end up with £3,061.92 after one year – an increase of £661.92.
You can have an investment Lifetime ISA – You can only hold your Help to Buy ISA in cash, while you can invest your Lifetime ISA in funds, shares, investment trusts and ready-made portfolios. This means if you are saving your money for longer you have the potential to generate greater returns by investing.
If you live outside London you can buy a more expensive property with the Lifetime ISA – With the Help to Buy ISA you can use it on a property worth up to £450,000 in London, but only on property worth up to £250,000 outside London. This has proved a problem for some in expensive areas outside of London, such as Cambridge and Brighton. With the Lifetime ISA there is a limit of £450,000 regardless of where in the UK you’re buying.
You can use the Lifetime ISA bonus for a house deposit, where the Help to Buy ISA bonus is only available after exchange – The Help to Buy ISA Government bonus is only issued after you have exchanged on a property, so cannot be used for the initial deposit, which has to be handed over at exchange. With a Lifetime ISA the Government bonus is paid monthly, meaning it can be used towards your deposit at exchange.
You can only use the Lifetime ISA if you’re between 18 and 40 years old – if you are over the age of 40, and have not yet opened a Lifetime ISA, you have missed the boat. This means your only option (up to the end of November this year) is to use a Help to Buy ISA to buy your first property.
If you change your mind, you’ll pay an exit fee on the Lifetime ISA – With the Help to Buy ISA, if you change your mind or want to make a withdrawal, for something other than buying your first home, you can redeem your money. As the Government bonus will not have been paid into the account, you don’t need to return any money. With the Lifetime ISA, if you want to withdraw money for anything other than buying a first home, retirement, or if you have a terminal illness, you will pay an exit fee. This is intended to claw back the 25% Government bonus, but it actually results in you losing the Government bonus and paying a 6.25% fee on top.
For example, if you invest £4,000, you’ll get the 25% government top-up and have £5,000 in total. If you choose to withdraw the money not for a first home or retirement, you’ll be charged 25%, which equates to £1,250. This means you have £3,750 left, £250 less than your initial investment.