Lifetime ISA (LISA) savers and investors whose income has been affected by Coronavirus and who want to access their Lifetime ISA funds early will no longer face an additional withdrawal charge, HM Treasury has announced. But the decision should not be taken lightly, say commentators.
The temporary rule change is part of the government’s package of support to help individuals, businesses and the economy during the current crisis.
The Lifetime ISA offers a 25% bonus, paid monthly, on up to £4,000 of savings each year. The current charge is 25% of the amount withdrawn.
This charge is to disincentivise people from using LISA funds, including the generous government bonus, for a purpose other than buying a first home or for retirement as intended.
The Treasury will legislate for a temporary reduction in the LISA withdrawal charge to 20% between 6 March 2020 and 5 April 2021 (inclusive). This will mean account holders will only have to pay back any government bonus they have received but will not pay the additional withdrawal charge of 5%.
The Lifetime ISA is intended to help younger people save for their first home or for later life. As with many other long-term saving products, withdrawing funds early or for unintended purposes normally incurs a charge.
But to help people who need to access to their money earlier as a result of the outbreak, the charge on unauthorised withdrawals will be temporarily reduced. This means savers will get back all the money they originally put in, subject to any investment losses incurred on stocks and shares Lifetime ISAs.
Economic Secretary to the Treasury, John Glen 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. This is part of the wide range of support we have put in place to help people who have been affected by Coronavirus with their finances.
“The rule change will be backdated to 6th March, so anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.”
Commenting, Tom Selby, senior analyst at AJ Bell, said: “This is a sensible and pragmatic move by the Treasury in unprecedented circumstances.
“The 25% LISA exit charge always seemed unfair as it meant savers who withdrew their fund early could end up getting back less than they originally put in. But during a global pandemic when many young people will be struggling to make ends meet, applying the exit penalty would have been particularly cruel.”
Richard Pearson, director of investment platform and LISA provider EQi concurred that “It is the right decision from the Treasury”, but added a word of caution “before anyone resorts to this”.
“If the money is in a cash LISA then it won’t be an issue to withdraw money saved for emergency reasons. But any money saved into an investment LISA may be subject to the fluctuations of the stock market.
“As we have seen recently, markets have been severely troubled by coronavirus and therefore investors’ portfolio values could be diminished at the moment. Selling investments and withdrawing money now could crystallise losses and mean permanent reductions in the value of their savings. It should not be a decision taken lightly.”
