Temporary reduction to the Lifetime ISA early withdrawal penalty

Author: Anna Bowes
01st May 2020

Economic Secretary to the Treasury, John Glen, has confirmed that those who are experiencing financial difficulties as a result of the coronavirus lockdown, will - for a temporary period - be able to access their Lifetime ISA funds without having to pay the full withdrawal penalty.

LISA

The Lifetime ISA was introduced in April 2017 and offers a great incentive for those aged between 18 and 40 years old, to save for either their first home, or failing that retirement. The incentive is a Government bonus of 25p for every £1 you deposit – a 25% uplift.

And that bonus is added each time a deposit is made, so that you can benefit from compounding interest or capital growth, on the bonus, as well as your personal deposit.

As a result and in order to deter savers from cashing in before the age of 60 for any other reason than buying their first home, there is a penalty of 25% on any withdrawals made.

This sounds fair considering that the Government has given you a 25% bonus. But, it’s not as simple as that and the penalty actually means that not only all of your Government bonus will be 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.

With the temporary rules, which will apply to withdrawals made between 6 March 2020 and 5 April 2021, only a 20% charge will be made, which would simply see the Government bonus of £1,000 clawed back (plus any interest earned on that bonus) – but not the extra 6.25%.

Of course, if you hold a stocks and shares Lifetime ISA, the amount you get back will be determined by the performance of the investment as well.

John Glen said: “We know that some people are experiencing financial difficulties during these unprecedented times and we want to make it as easy as possible for people to access their savings, especially if it helps them avoid falling into high cost or unmanageable debt.

“That’s why we are reducing the withdrawal charge for Lifetime ISAs, so people can access their funds to help get them back on their feet. This is part of the wide range of support we have put in place to help people who have been affected by Coronavirus with their finances.”

Although this announcement was made today (1 May 2020) the new rule will apply to any withdrawals made since 6th March 2020 – so anyone who has made a withdrawal since then and paid the 25% charge will have the difference refunded.

 

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