Lifetime ISA exit penalty cut – but what does it mean for savers?
The Government has temporarily cut the exit charge that savers pay when they withdraw money from their Lifetime ISA for anything other than buying a first home or reaching age 60, reducing it from 25% to 20%.
During the current crisis the Government has recognised that people might need to access their Lifetime ISA savings because they’ve seen their income fall.
What was the old system?
Until now if you wanted to withdraw money from your Lifetime ISA you’d pay 25% of your withdrawal amount as an exit charge. This was intended to discourage people from dipping into this money, but also to stop people claiming the 25% Government bonus and then taking the money out.
For example, if some paid in £4,000 in a year and got a £1,000 Government bonus, and that same person withdrew the entire £5,000 they’d pay an exit fee of £1,250 – losing £250 of their own money and the whole Goverment bonus.
The Government has now reduced this exit charge to 20%, meaning that (assuming no investment losses) it is just taking back the Government bonus.
In the above example the person withdrawing £5,000 would now pay a £1,000 withdrawal charge, meaning they get back their entire £4,000 initial deposit.
When does this take effect from?
While the Government only announced the change this month, it is backdated to 6 March this year.
Currently the change in the exit charge runs until 5 April 2021. There is some hope it will become a permanent change at that point, but there’s no indication from the Government on that yet.
Can I get a refund if I have already withdrawn money?
If you’ve taken money out of your Lifetime ISA since 6 March this year then you’re due a refund, assuming you have paid the 25% exit charge as under the new system you should have only paid 20%. You’ll need to contact the company with whom you have your Lifetime ISA so they can process the refund.
If you still have your Lifetime ISA account open, for example you only withdrew some of the money in there and left more in the pot, then your ISA provider will pay the refund back into that account. However, if you withdrew all the money in your Lifetime ISA you’ll get the refund back into your bank account.
What happens if I take money out now?
The Government systems haven’t quite caught up with its change in policy, which has caused confusion with some Lifetime ISA providers.
Many providers, including AJ Bell Youinvest, will process any withdrawals now with the new 20% exit penalty. Some other providers will continue to process the previous 25% exit charge until HMRC updates its systems to allow for a 20% withdrawal charge, at which point they will help the saver claim their refund.
Skipton Building Society, one of the largest cash Lifetime ISA providers, has chosen to halt all Lifetime ISA withdrawals until it gets more clarity on how it can process the new withdrawal charge. These customers will have to wait to access their money until it decides to start to allow withdrawals again.
Should I be taking money out of my Lifetime ISA?
It’s understandable that with people being furloughed or losing their jobs they may need to raid their savings to pay their bills.
If you don’t have a large savings pot to fall back on you may feel the need to withdraw money from your Lifetime ISA. However, the Lifetime ISA is intended as a long-term savings product and so should be preserved where possible. If other cash savings are available it may be better to use these first.
How does the lifetime ISA work?
Investors can use the Lifetime ISA to either save for a house deposit or for retirement. The money can only be used to buy your first home or from the age of 60 to help fund your retirement. Any withdrawals for any other reason, other than if you’re terminally ill, will incur an exit charge.
Savers can put up to £4,000 into the Lifetime ISA each year, which is topped up by a 25% Government bonus – to a maximum of £1,000 each year.
If you are using it to buy a property, you must be a first-time buyer, the home must cost £450,000 or less and it must be for you to live in (so not a buy-to-let property).
To open a Lifetime ISA you must be between the ages of 18 and 39, and you can carry on paying into the ISA (and getting the Government bonus) until you reach 50.
If you have an investment Lifetime ISA you also need to think about whether your investments have fallen in value during the recent market turmoil. If they have then you will be locking in losses by selling now, meaning you could be taking out less than you paid in.
For example, if you paid in £4,000 and got a £1,000 Government bonus but your investments have fallen by 10% in value, your current pot will be worth £4,500. If you choose to withdraw the entire pot you’ll then pay a 20% exit charge, equating to £900, meaning that you’ll actually get back £3,600 which is £400 less than you put in.