Treasury cuts Lifetime ISA exit charge to 20%

Amid punishing circumstances for investors, the Treasury brought some good news last week, offering some relief for those holding Lifetime ISAs. 

The Lifetime ISA (LISA) was introduced in 2017 and lets you save up to £4,000 every tax year towards a first home or your retirement, with HMRC adding a 25% bonus on top of what you save. That means you could get a chunky £1,000 of free cash annually. Plus, you earn interest on whatever you save, and as it’s an ISA, that interest is tax-free.  Up until now however their has been a exit charge of 25% for anyone who wishes to withdraw their funds, unless the purpose of the withdrawal is to purchase a first home or retiring.

The government has now temporarily changed its rules surrounding Lifetime ISAs in a bid to help those who want to access funds early in light of the coronavirus outbreak.

In a statement on 1 May, HM Treasury announced individuals whose income had been affected by the pandemic would no longer be charged an additional withdrawal fee if accessing funds early.

This means that LISA providers who have deducted a 25% withdrawal charge since the 6 March will be able to correct the withdrawal charge made by claiming back one fifth of the original withdrawal charge from HMRC. The corrected amount claimed will be credited back into the investor’s LISA.

Under the temporary rule announced earlier this week, the charge on unauthorised withdrawals will be reduced to 20 per cent for the period between March 6, 2020, and April 5, 2021.

The move means savers will get back all the money they originally put into the Lifetime Isa, subject to any investment losses incurred on stocks and shares.

John Glen, economic secretary to the Treasury, said: “We know that some people are experiencing financial difficulties during these unprecedented times and we want to make it as easy as possible for people to access their savings, especially if it helps them avoid falling into high cost or unmanageable debt.

“That’s why we are reducing the withdrawal charge for Lifetime ISAs, so people can access their funds to help get them back on their feet.”

The Treasury recently came under fire for factoring Lifetime ISA savings into Universal Credit eligibility calculations, penalising those who are saving up to buy their first home.

Carol Knight, chief operating officer at Tisa, said the rule change was a “fantastic step” which would make a significant difference to savers hoping to access savings during the coronavirus pandemic.

Ms Knight added: “We have worked closely with the Treasury and HMRC during this crisis to work out how best to help people that may be struggling and we fully support this temporary solution which allows savers to access their funds without being penalised.”

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