• As part of its emergency Coronavirus response the Treasury reduced the Lifetime ISA exit charge for 2020/21 from 25% to 20% (https://www.gov.uk/government/news/lifetime-isa-rules-changed-to-help-people-whose-incomes-are-affected-by-coronavirus?utm_source=9275796c-84a1-44d5-afe2-29d4748a8207&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate)
• Exit penalty is due to increase back to 25% from 6 April 2021
• However, unemployment and serious financial hardship is likely to come if Government support is pared back from April
• AJ Bell urges Chancellor to provide certainty for savers by making the reduction to 20% permanent
Tom Selby, senior analyst at AJ Bell, comments:
“The Treasury’s decision to cut the Lifetime ISA exit charge from 25% to 20% for 2020/21 was pragmatic and designed to ensure those facing serious financial hardship during lockdown could at least get at their savings without being unfairly penalised.
“However, as things stand the exit charge is due to increase back to 25% from April this year, meaning anyone under age 60 who wants to access their money for anything other than a first house purchase faces not only paying back the Government bonus they received on the money they paid into their Lifetime ISA but being hit with a penalty on top of that.
“The increase in the exit penalty will likely be happening at the same time as millions of employees are being moved off furlough support and facing huge financial insecurity.
“While some jobs will remain viable as the UK economy hopefully begins to open up, many will sadly be lost. Anyone facing unemployment at this time may well need to use their savings to make ends meet – including money set aside for the future in a Lifetime ISA.
“Setting the Lifetime ISA exit charge at 25% always felt an unfair punishment for those who choose to access their money early and runs counter to the overall aim of the product.
“As a minimum the Government should keep the exit charge at 20% for the 2021/22 tax year. But a preferable solution would be to make the reduction permanent, meaning the aim of the charge would simply be to return the upfront bonus.”
How the Lifetime ISA exit charge works
Take a 30-year-old who pays in £4,000, the maximum allowed per ta year, into a Lifetime ISA. This would be topped up automatically by a 25% bonus, meaning they would have £5,000 in their account.
If in the current tax year they withdrew the entire fund and didn’t use the money towards a first home, they would pay a 20% early withdrawal charge, which would be £1,000 – exactly the amount they received as a bonus from the Government.
However, if they made the same withdrawal in 2021/22, a 25% early withdrawal charge would be levied, meaning they would pay back the £1,000 bonus and face an extra £250 penalty on top of that.
If someone has contributed to their Lifetime ISA for multiple years and benefited from investment growth, the additional exit penalty will be even more pronounced.
