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Government cuts LISA withdrawal penalty

Jason Roberts looks at the recent temporary cut to the Government’s LISA withdrawal charge.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The Treasury has temporarily cut the Lifetime ISA (LISA) withdrawal charge from 25% to 20%. This lower charge will apply to all chargeable withdrawals between 6 March 2020 and 5 April 2021.

We take a look at how this reduced withdrawal charge could affect investors.

This article is not personal advice. ISA and tax rules can change and their benefits depend on your circumstances. If you’re not sure, please speak to a financial adviser.

How does this affect you?

Dipping into a LISA shouldn’t be the first port of call. Its purpose is to encourage people to save for their long-term goals – buying a first home and saving for retirement as a complement to their pension.

But if you need to take money out for a reason other than buying your first home and/or before age 60, then this is usually an unlisted withdrawal with a Government charge.

Ideally people will have emergency cash savings in an easy access account to call on in difficult times. But given that life is proving less than ideal for many at the moment, being able to access the money in a LISA now with a reduced withdrawal charge will come as a relief to those that desperately need it.

We’ve always said that the charge to withdraw money from a LISA was too high – and we know that some clients feel the same way. So, along with others, we’ve been actively pushing for an immediate change since mid-March.

The drop means that if you make a withdrawal from your LISA during the current crisis you’ll effectively lose the Government bonus plus any growth on that bonus, but you’ll no longer face an extra penalty on top.

The lower charge will apply to any unlisted withdrawals between 6 March 2020 and 5 April 2021. If you’ve withdrawn money from your LISA since 6 March and faced the full withdrawal charge, HMRC has said you’ll be able to claim back the extra slice of the withdrawal charge. We’re speaking with HMRC to find out more about how this will work and when the money will be paid back. LISA withdrawals can’t be replaced without eating into your LISA allowance.

Unfortunately, at the moment, it looks like this is just a temporary change. But, we want to see this become permanent. This current crisis has shown how much our plans can change overnight – we think the LISA needs to allow investors to roll with the punches.

Find out more about the HL Lifetime ISA

More on the LISA withdrawal charge

The Government pays a 25% bonus on money put into a LISA. The maximum you can put into a LISA each tax year is £4,000. So the maximum bonus is £1,000.

You need to be between 18 and 39 to open a Lifetime ISA. But you can still pay in – and get the Government bonus – until you turn 50. You can normally withdraw this money free of the charge 12 months after the first payment if you’re using the money towards a mortgage to buy your first home worth up to £450,000 in the UK. Or you can wait until you're 60 and take your money out free of the charge then.

But, if you want to take money out before you're 60 and you aren't buying your first home, then you will most likely be subject to a withdrawal charge.

Before this change, if making an unlisted withdrawal, you would have been charged 25% of the amount withdrawn. If you had put £4,000 into your LISA and received the Government bonus of £1,000, assuming no change in the value of your investments, you'd have only got back £3,750 if you took the money out. A 20% charge now means you'd get back the full £4,000 you originally put in, assuming the value of your investments have not changed.

With a LISA where you can invest in stocks and shares, the amount of money you get back will depend on the performance of your investments. The value of investments can fall as well as rise so you could get back less than you invest.

Find out more about the HL Lifetime ISA


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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