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Lifetime ISA withdrawal penalty reduced due to coronavirus

Lifetime ISA withdrawal penalty reduced due to coronavirus

Lifetime ISA holders who withdraw money from their account will effectively face no penalty until next April, after the Government announced changes to its rules.

The Lifetime ISA (LISA) lets you save up to £4,000 a year towards your first home or retirement, and gives you a 25% cash bonus of up to £1,000 a year on top. Previously, you were charged 25% of the amount withdrawn if you took cash out before you turned 60 or if you were not buying a property.

Now, there'll be a reduction in the LISA withdrawal charge to 20% between 6 March 2020 and 5 April 2021, so while there’s still a penalty this effectively means that the bonus you get is taken away, so you'll end up in a similar position to the one you were in before you got the bonus. For a cash Lifetime ISA this means you'll get back the amount you put in (plus some interest). For a stocks and shares LISA, it'll depend on how your investments have done.

Anyone who has withdrawn their money since 6 March 2020 and paid a 25% charge will have the difference refunded.

The Government says this should help people whose income has been affected by coronavirus and who want to access their funds early.

See our Lifetime ISAs guide for more information on LISAs and how they work, or our Coronavirus Finance & Bills Help guide for what's happening with other savings products.

Martin: 'The penalty has always been controversial'

Martin Lewis, founder of MoneySavingExpert.com, said: "The effective 6.25% penalty for taking money out of a LISA has always been controversial. It's the reason why many prefer its predecessor, the Help to Buy ISA, which lets people take money out penalty-free, even though that has more restrictions.

"Ensuring people have savings ensures they have far greater financial resilience – which is exactly what we need during crises like the one we are in right now. The LISA is supposed to be a vehicle that stays with people throughout their lives, used for both first-time buyers and then saving for later life.

"Hopefully, now that penalty has been removed, the Government will realise it would be a mistake to ever put it back on."

How does lowering the penalty work in practice?

If you put the maximum £4,000 into a LISA in a given tax year, you'd receive a 25% (£1,000) bonus, so the balance would be £5,000.

Prior to the Government's change, if you withdrew your funds early, you would be charged 25% of the balance, which recoups the bonus plus an additional charge (equivalent to 6.25% of the money you put in). So you'd get back £3,750.

Now, with the charge at 20%, you'd get back the full £4,000 – this is the money you originally put in.

The example above works if you've saved in a cash Lifetime ISA, where there's no risk to your savings. For stocks and shares ISAs, what you'll be able to get back will depend on how well your investments have done.

What does the Government say?

Economic Secretary to the Treasury 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."