Savers using the new Lifetime ISA (LISA) won't be charged the 25% penalty for withdrawing money which isn't put towards a first home or retirement in the first year of the scheme, the Government has announced.
Speaking in a House of Commons debate, Financial Secretary to the Treasury Jane Ellison said those who put money into a LISA will be able to close it and access their cash in the 2017/18 tax year without any charges.
This is because savers could've faced the penalty before receiving their state bonus, paid at the end of 2017/18. From April 2018 the bonus will be paid monthly.
For full details on how the scheme works, see our Lifetime ISA guide.
How will LISAs work?
The Lifetime ISA, due to be launched in April next year, will allow savers aged between 18 and 39 to put away £4,000/year, with the state adding a 25% bonus to annual savings.
The LISA comes with a dual purpose – the money can be put towards a first home (up to the value of £450,000), or it can be used for retirement.
A 25% withdrawal penalty applies if you cash in the LISA before the age of 60 and don't use the cash to buy a first property – although the Government's now said this won't be the case in the first year of the scheme.
If you do decide to close your LISA next year, be aware that you won't receive any bonus as – for 2017/18 only – the 25% boon will be paid at the end of the tax year. As above, it'll be paid monthly from April 2018.
Speaking about scrapping the charge for next year, Ellison said: "In 2017/18 only, the bonus will not be paid monthly, as it will be from April 2018 on, but will be paid as an annual bonus at year end."
She explained that this could have created a "difficult case" where people faced a 25% Government charge up to 12 months before they received their bonus.
Ellison continued: "We have listened to representations on this point, and so, to improve the product for consumers, I can confirm that there will be no Government charges in 2017/18."