LISA exit penalty temporarily cut


At the end of last year, as the Help-to-Buy ISA were withdrawn, and Lifetime ISAs (LISAs) continued as the successor to support first time buyers house purchase, £9m of income was generated for the Treasury from the early withdrawal penalty. As a reminder, the penalty generally applies if the LISA is cashed in before age 60 and the proceeds are not used in a first home purchase. At 25% of value withdrawn, the penalty more than claws back the Government’s contribution bonus. Do the maths and in effect the penalty removes 6.25% of the personal contribution, plus any growth.

On Friday 1 May, the Treasury announced that it would legislate to reduce the penalty to 20% between 6 March 2020 and 5 April 2021 (inclusive). The timing means that anyone who has cashed in since 6 March 2020 is due a refund. The reduction to 20% means the penalty will now only remove the Government bonus and any growth thereon, as the example shows:

5% makes a positive difference

Sandra saved £200 a month in a cash LISA for 12 months from March 2019, receiving a £50 Government bonus on each contribution. In March 2020, she stopped contributions when she was put on furlough and two months later, short of money, she cashed in her LISA. The pre-penalty value of her LISA was £3,056. The temporarily reduced 20% withdrawal penalty amounted to £611.20, meaning she received £2,444.80, a sum that was the equivalent of her total personal contributions plus growth.

If the old 25% penalty had applied, she would have received £2,292, £108 less than her personal contributions.

It is interesting to note that the Treasury publication on the change explains the 25% charge as designed “…to disincentivise people from using LISA funds, including the generous government bonus, for a purpose other than buying a first home or for later life as intended”. In other words, like many other Covid-19 temporary measures, the 20% penalty will not endure.