• The Lifetime ISA (LISA) early withdrawal charge is set to rise from 20% to 25% from 6 April 2021
• Increase means the charge effectively acts as a 6.25% penalty on non-permitted LISA withdrawals
• Savers will still be able to access their LISA pot tax-free from age 60, where the funds are used towards a deposit on their first home*, or if they become terminally ill
• Anyone planning to access their LISA pot in any other circumstances face a race against time to avoid the higher early withdrawal charge
Tom Selby, senior analyst at AJ Bell, comments:
“Given the Government’s initial decision to reduce the LISA early withdrawal charge from 25% to 20% was meant to help struggling savers facing income uncertainty as a result of the pandemic, it would have made sense to extend the reduction into 2021/22 at the very least.
“With the furlough scheme set to be phased out, this is exactly the point millions of people will likely face the greatest uncertainty over their future employment.
“But Chancellor Rishi Sunak chose not to go down this route, meaning anyone planning to access their LISA early faces a race against time to dodge the exit charge hike.”
Why a 25% early withdrawal charge = a 6.25% penalty
“The impact on your pocket from the early withdrawal charge increase is significant. Take someone who has paid £4,000 into their LISA and had this topped up to £5,000 via the Government bonus. They then decide to access their entire pot early because they’re worried about their income.
“If they do this before 6 April 2021, they will be charged 20% of the withdrawal, meaning they will simply repay the £1,000 Government bonus they have received.
“However, if they do this from 6 April 2021, they will be charged 25% of the withdrawal, returning the £1,000 Government bonus and paying a £250 penalty as well.
“This extra £250 penalty is 6.25% of the £4,000 the investor originally paid into their LISA.”
*Property must be valued at £450,000 or less