Are your savings among the £5.5bn stuck in a zombie Isa?

William Boyle has diligently saved into his Help to Buy Isa for four years, but it has all been for nothing.
Boyle (not his real name) opened his Isa in 2019 and managed to build a pot worth £12,000 at the tender age of 23. But then he found his dream first home — and discovered that his account could be useless.
The £300,000 three-bedroom house in Southport was too expensive to buy with his Isa, and it would take three years to move his money to an account which he could use to buy the home. “It is so frustrating. I feel like saving has been a complete waste of time,” Boyle said.
Help to Buy Isas were launched in 2015 and replaced with Lifetime Isas in 2017. They aimed to help young savers build up a deposit for a first home, and came with cash bonuses of up to £3,000. Now, however, they are becoming too restrictive for many savers to use and there are calls for the government to change the rules in the budget this month. Here’s what you need to know.
Anyone over 16 could open a Help to Buy Isa account and save up to £200 a month, getting a 25 per cent government bonus if they used the money to buy a first home. The maximum bonus was £3,000, on £12,000 of savings.
The last accounts were opened in November 2019 and Lifetime Isas came along in 2017. They could be opened by 18 to 39-year-olds and were designed to help save for a house or retirement. The savings limit was higher, at £4,000 a year, and they came with the same 25 per cent government bonus. If you use the money for anything other than a first home or after the age of 60, however, you have to pay a 25 per cent penalty, which means you forfeit the bonus and some of your own money too.
Those who already have a Help to Buy Isa can keep saving into it until November 2029 and have until November 2030 to claim their bonus. There are still 2.2 million active accounts, holding about £5.5 billion of savings, according to the comparison site Finder.
These savers are worse off than Lifetime Isa savers: they can’t put away as much, so they don’t earn as big a bonus and there is a lower limit on the value of house you are allowed to use those savings to buy.
The Help to Buy Isa can only be used to buy a property worth up to £250,000 (£450,000 in London). If you buy a property above the limit, you do not get your bonus, which is claimed from the government as part of the conveyancing process.
This threshold has not changed since the accounts were launched yet average house prices have gone up 41 per cent since 2015. If the £250,000 price threshold had increased in line with house prices, then Boyle would have been able to buy his £300,000 home with his Help to Buy Isa. In the end, he withdrew his money and used it for a deposit anyway but missed out on £3,000 in bonuses that he could have used for his move. He would have transferred his money into Lifetime Isa but you can only pay in £4,000 a year, so he didn’t have time.
“£3,000 is so much money, especially when you are having to think about the other expenses of buying a home, such as furniture. It would have made a big difference,” Boyle said.
• Married with children: meet the new first-time buyers
Lifetime Isa savers can use the money in their accounts to buy a home worth up to £450,000 anywhere in the UK. This threshold has also not changed since the accounts were launched in 2017. Campaigners say the Help to Buy Isa house price limit should be brought up to the Lifetime Isa limit and that both should then be raised in line with house prices.
Paula Higgins from the HomeOwners Alliance, a consumer site, said: “The property price thresholds have not changed, but because house prices have grown, savers are not likely to qualify for the 25 per cent bonus under the scheme limits.
“This means that first-time buyers face putting their lives on hold because they won’t be able to use the government bonus they have been counting on, or they will end up having a desperate hunt for properties that meet the criteria, which is far from ideal.”
Because Help to Buy Isas are obsolete, there is less incentive for banks to offer competitive rates, and so savers are losing out. Lifetime Isas also come in a stocks and shares version, so there is greater potential for growth, whereas Help to Buy Isas are cash-only.
“Help to Buy Isas have become zombie accounts, mindlessly shuffling towards their demise,” said Sarah Coles from the investment firm Hargreaves Lansdown. “They can’t attract new customers with decent interest rates, so they don’t offer anything particularly special, especially when compared with a Lifetime Isa.
“Given that you might hold these Isas for years, the missed interest can make a big difference to the deposit you can put down, and the property you can afford to buy.”
The best rate on a Help to Buy Isa is 3.5 per cent from HSBC, and is only available for customers who already have a current or savings account with the bank, according to the consumer site MoneySavingExpert. The best Help to Buy Isa rates for new customers are 2.75 per cent from Halifax, Bank of Scotland and Lloyds Bank.
Meanwhile, the top cash Lifetime Isa pays 5.09 per cent from Dodl, through the investment platform AJ Bell. Someone with £10,000 saved would earn £509 in interest over a year, compared with £350 for someone with the best Help to Buy Isa.
Boyle earned 3.25 per cent on his Help to Buy Isa. “I would have been better off with the money in a general savings account, which would have had a higher interest rate,” he said.
• A guide to buying your first home
You can use a Help to Buy or a Lifetime Isa when you buy a first home but you can’t use both. And savers who are tempted to move their Help to Buy pot into a Lifetime Isa to take advantage of its benefits are discovering that the process is not straightforward.
You can’t transfer the funds in one go. Instead you need to pay the money out of the Help to Buy Isa and into a new Lifetime Isa, following the Lifetime Isa rules of a maximum of £4,000 a year. If you had saved £12,000 in your Help to Buy Isa it would take you three years to move it across.
“The Lifetime Isa offers more opportunity to save each year, so why can’t people simply transfer their savings, and the bonus they were promised, into it?” Matt Mckenna from Finder said.
On top of that, savers must have held money in a Lifetime Isa for at least 12 months before they can use it to buy a property or they have to pay the 25 per cent penalty.
“This is holding people back,” Coles said. “You could be in a position where you have to postpone buying a house because you need to wait a year between opening the Lifetime Isa and buying a property.”
Boyle said: “I saved hard for that money and felt that I should have been able to transfer it to a Lifetime Isa without any restrictions.”
The Treasury said: “The Lifetime Isa provides a 25 per cent bonus on up to £4,000 a year, which is why transfers are capped at that level. The Help to Buy Isa property price cap is above the average price paid by first-time buyers.”