Those who may need to withdraw cash from their Lifetime ISA (LISA) for a purpose other than buying their first home and are under the age of 60, may need to make that decision in a hurry as the early withdrawal penalty will soon be increasing to its original level, which could see some savers out of pocket.
The LISA was launched in April 2017 and the Government adds a generous 25% bonus to each deposit made, making it a really valuable savings vehicle especially for young wannabe homeowners.
Those aged between 18 to 39 can open a LISA and deposit up to £4,000 a year – which the Government will top up with up to £1,000 pa. And because that bonus is added shortly after you deposit the cash, you will earn interest or growth on not only your deposit, but the Government bonus too!
Of course, as the proceeds of the LISA bonus can only be used to either purchase your first home, or to support you in retirement after the age of 60, there is a penalty applied if you try to withdraw your cash for any other purpose.
Before the Coronavirus Pandemic, the penalty for withdrawing cash for anything other than the stated purposes was 25%, which seems fair considering that the Government has given you a 25% bonus. But what it actually means is that not only is all of the Government bonus clawed back, but 6.25% of your personal contribution as well.
For example, if you were to deposit the maximum £4,000 into the LISA, the Government will top it up by £1,000. If you needed to withdraw the full £5,000 you would have to pay a penalty of 25% on £5,000, which is £1,250. So, assuming that no interest has been earned, you would receive back just £3,750 of your original £4,000 deposit.
But back in May last year, it was announced that the penalty would be reduced to 20% on any withdrawals made between 6th March 2020 and 5th April 2021 – in order to support those facing financial difficulties due to the Covid crisis. So, the original bonus would be clawed back, but not the extra 6.25%.
Although we are still far from back to normal, unfortunately there has been no reprieve from the original announcement, so the 25% penalty will apply once again to any unauthorised withdrawals made from 6th April 2021.
This is disappointing as many are continuing to struggle financially. But for those who can still afford to save, even with the 25% withdrawal penalty, the LISA is a great savings vehicle - in particular to help young people to get onto the property ladder. It’s just important to understand the Terms and Conditions.
For more information about the Lifetime ISA, download our Factsheet here.