Last year, the Government made a temporary reduction to the Lifetime ISA (LISA) withdrawal charge for the period 6th March 2020 to 5th April 2021.
What is a Lifetime ISA (LISA)?
A Lifetime ISA is an Individual Savings Account that younger adults between the ages of 18 and 40 can save, tax free for a deposit to their first home or save for later life (a tax free pension). You can save up to £4,000 each year until you are 50 years old. The government then adds a 25% bonus to your savings, up to a maximum of £1,000 per year. You can withdraw funds without penalty and tax free if you buy a home or after age 60 if using as a 'tax free' pension savings plan.
The reduction in the withdrawal charge was in response to the Covid-19 pandemic and to help investors withdraw funds from their LISA during coronavirus. The exit penalty was reduced to 20% from 25%.
The LISA withdrawal charge is now back to 25% from 6th April 2021 and will apply to all unauthorised withdrawals from a LISA on or after 6th April 2021.
As a reminder, the penalty applies of 25% of the value withdrawn if the LISA is cashed in before the age of 60 and the proceeds are not used for a first home purchase.
The penalty removes 6.25% of the personal contribution plus any growth and claws back more than the Government’s 25% contribution bonus.
HMRC confirmed in their latest tax-free savings newsletter that the charge should always be deducted at the time when the withdrawal is made and not the requested withdrawal date.
It was sensible for HMRC to allow access with a lower penalty during the pandemic and now we are easing out of the same, it makes sense to restore the penalty to encourage young savers to keep savings towards a mortgage deposit.