When you open a Lifetime ISA there are some rules around how, when and what you can withdraw this money for.
Any withdrawals within the first 12 months of your first payment into a Lifetime ISA will incur a 25% government withdrawal charge, which would mean you would get back less than you paid in. After that, you can withdraw money to buy your first home, but for any other withdrawals before the age of 60, the government withdrawal charge will apply (unless you are diagnosed with a terminal illness).
Due to an announcement made by HM Treasury on 1 May 2020 there have been some important temporary changes to the government withdrawal charge.
COVID-19 Lifetime ISA Changes
On 1 May 2020 HM Treasury announced that chargeable withdrawals made between 6 March 2020 until midnight on Monday 5 April 2021 would have the government withdrawal charge of 25% reduced to 20%. The government intend this to enable LISA savers, whose income has been reduced because of the effects of the coronavirus (COVID-19) situation, to access funds saved in their accounts
The reduced government withdrawal charge applies to all chargeable withdrawals, these are withdrawals within the first 12 months of a payment into the Lifetime ISA, before the age of 60 and those that will not be used for the purchase of their first home.
This means, whilst the temporary reduction in the government withdrawal charge applies, savers will only lose an amount which is proportionate to the government bonus and interest earned on that bonus when making a chargeable withdrawal and will not result in the loss of your own savings.
This means that anyone subject to a 25% government withdrawal charge between the 6 March 2020 to the date that the change is implemented will be entitled to a 5% rebate. (One fifth of the government withdrawal charge)
How the charge is calculated
The government withdrawal charge is only applied to the amount you withdraw. This will normally be charged at 25%, but for withdrawals between 6 March 2020 and 5 April 2021 it will be reduced to 20%.
Where the full 25% government withdrawal charge applies, as well as returning the 25% government bonus, you'll also lose some of your own savings and will receive back less than you deposited into the account.
For the reduced 20% withdrawal charge, you will only lose an amount which is proportionate to the government bonus and interest earned on that bonus.
An example of how each of the government charges is calculated
This example doesn't include any interest earned.
||25% Government withdrawal charge
||20% Government withdrawal charge (6 March 2020 – 5 April 2021)
|You open the account with
|The government bonus is added
|Total for 1st year
|You make a chargeable withdrawal
|The government withdrawal charge
|You receive back
|You lose this much money
Before deciding whether to make a chargeable withdrawal from your Lifetime ISA you should be aware that the Lifetime ISA is not a flexible ISA. This means it does not allow funds to be taken out and replaced within the same tax year without affecting your Lifetime ISA allowance.
This would mean that, if you have already used your Lifetime ISA allowance for the current tax year, you would not be able to fund your Lifetime ISA again until the 6 April 2021, and therefore you will miss out on any 25% government bonuses for funds that you have withdrawn.
With this in mind, you will need to consider whether it is better to withdraw only what you need at any one time, rather than close your account fully. This could help you make the most of your 25% government bonus and continue to grow your account balance.
The £4,000 maximum annual deposit allowance will still apply so:
- If you deposit £4,000 and withdraw it, you cannot make another LISA deposit until 6 April 2021
- If you deposit £1,000 and withdraw it, you can only deposit a further £3,000 this tax year