Ask Anna: I have seen adverts about the ‘Help to Buy Isa’. Would this be a good option for my daughter?

13th January 2016

Ask Anna

Q. My 19 year old daughter has a cash ISA with Tesco that has finished its fixed term and is now only paying 0.75% interest

I have seen adverts about the ‘Help to Buy Isa’.  Would this be a good option for her to invest in for the future? She has just over £5000.00 at the moment.

This should be a simple question, but of course it depends on her personal situation. However, as you say, now that the fixed term has ended on your daughter’s ISA, it has been switched into the Tesco Cash ISA which is an easy access ISA paying 0.75% AER.

If your daughter is a first time buyer, a Help to Buy ISA (H2B ISA) could be a sensible option. First time buyers will be able to save an initial opening deposit of up to £1,000 and then up to £200 per calendar month into a H2B ISA, which will be boosted by the government by 25% when they purchase their first home, so a bonus of £50 for every £200 saved, up to a maximum bonus of £3,000.

Currently the best H2B ISA rate available is 4% with the Halifax. See our Best Buy table for more information.

But there are a few things to consider.

Firstly, the amount that can be saved into a H2B ISA is much less than the current annual adult ISA allowance and indeed the value of her current ISA. As mentioned above, when the HSB ISA is set up, a lump sum of up to £1,000 can be added, plus a maximum of £200 per calendar month.

So, she could transfer £1,200 from the Tesco ISA into the H2B ISA and then transfer the remainder to another account, ready to top up her H2B ISA with £200 a month – unless she has additional funds that she can use to do this.

Assuming she doesn’t have additional funds, the funds remaining in the Tesco ISA, after the H2B ISA has been set up, could be transferred into another cash ISA from which she would need to request a withdrawal of £200 per month which can then be deposited into the H2B ISA. It could also potentially be moved into a standard savings account that is paying more gross interest as this would still be tax free if your daughter is a non-taxpayer. Even if she’s not, the introduction of the new Personal Savings Allowance (PSA) in April 2016 means that for a basic rate tax payer, the first £1,000 of savings interest earned will be tax free anyway.

As mentioned above, if your daughter is a non or basic rate tax payer, has no other savings and is not using her ISA allowance each year, then moving the money like this should not mean that she loses out on the ISA allowance than that she has accumulated so far. This is because she will be moving it into the H2B ISA over the next few years and earning tax free interest in the meantime, either by retaining the balance in another cash ISA and drawing down on this, or by utilising some of her PSA. 

Currently the best easy access cash ISA that she could transfer the remainder to, is the Coventry Easy Access ISA which is paying 1.50% AER.

The best non ISA easy access account is with RCI Bank, which is a French Bank and is therefore covered by the French equivalent of the UK FSCS. It is NOT COVERED BY UK FSCS. The Freedom account is paying 1.65% gross/AER.

For more information about the Help to Buy ISA either call on of our advisers on 0800 321 3581 or download our FREE factsheet.

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