The Lifetime ISA (LISA) is one of the best products available to help first time buyers save for their deposit, thanks to its 25% government bonus. However, the withdrawal penalty often discourages people from opening one – meaning they miss out on a great opportunity to boost their savings. We’ve been calling for changes to the Lifetime ISA withdrawal rules for some time.
The withdrawal penalty, for people who withdraw for any reason other than buying their first home or for retirement, is 25%. It was temporarily reduced to 20% in May 2020 to support people who needed early access to their savings during the coronavirus pandemic. However, it will revert to 25% on 6 April 2021, meaning you lose the government bonus and pay an additional penalty of 6.25% if you withdraw for other reasons.
As the largest Lifetime ISA provider, we believe this reduction should be permanent, so we’ve signed this petition – and we’re asking you to join us by signing it too. Here’s why.
As our co-founder, Ben Stanway, puts it: “The reality is that things happen in life that we can’t predict. People want to take their money out early for all sorts of reasons. They may have met someone who already owns a home, chosen to invest in their education, or decided to move to another country – normal life events that are penalised under the current rules.”
We feel strongly that no one should be penalised if they need to access their savings earlier than expected, or because of reasons outside their control. The impact of the pandemic has called this into even clearer focus.
How does the withdrawal penalty work?
If you need to withdraw money for any reason other than your first home (up to £450,000) or retirement, you’ll pay a government charge of 25% on any sum you withdraw. This equates to losing the government bonus, plus paying an additional 6.25% out of your own Lifetime ISA savings.
Here’s a working example of the 25% withdrawal charge:
If you deposit £1,000 into a Lifetime ISA, you’ll receive a 25% government bonus, increasing your savings to £1,250. But with the usual 25% withdrawal penalty you’d be charged 25%, leaving you with £937.50 – less than you initially deposited.
And here’s what happens if it’s just 20%:
With a 20% withdrawal penalty, it means that you only lose the government bonus. In the same example, you’d be charged 20% (or £250), so you’d still get back your initial £1,000. Please note, this excludes any investment gains/losses and fees for Stocks & Shares Lifetime ISAs.
A petition has been brought forward asking the government to permanently reduce the Lifetime ISA withdrawal penalty from 25% to 20%. And we couldn’t agree more! That’s why we’ve signed the petition, and we need your help too. If the number of signatures reaches 100,000, the petition will be considered for debate in Parliament.
We’ve previously spoken to the Treasury to suggest other improvements to the Lifetime ISA withdrawal rules, from extending the list of allowable withdrawal events, to linking the Lifetime ISA house price cap to the official house price index.
While we can’t predict what will change, we’ll continue to campaign for improvements to the Lifetime ISA to help everyone save and invest for their future. We’d love to see this petition become a reality.