Save, make, understand money


BLOG: Don’t cash in your Lifetime ISA even though penalties have been slashed

Joanna Faith
Written By:
Joanna Faith

Struggling savers will temporarily incur a lower penalty charge for dipping into their Lifetime ISAs early but that doesn’t mean people should raid their accounts, writes Steve Code.

Launched in April 2017, the Lifetime ISA (LISA) heralded a new way for those aged 18-39 to start saving for the deposit for their first home.

Coupled with the added 25% government bonus and up to an additional 1.5% interest rate (depending on your provider), the Lifetime ISA has proven very popular for those wishing to purchase a first home.

Given the current Covid-19 situation we find ourselves in, questions are now being asked as to whether the LISA is still going to provide the security and return it initially promised, especially around the low interest rates and fluctuations in the stocks and shares market that we are presently witnessing.

The concern for many is simple: given that lots of people will have been furloughed or in the worst scenario, made redundant, the worry is that LISA holders will have no other option other than to ‘cash in’ their LISA and withdraw the funds.

What about the penalty if I do need to withdraw my funds?

The 25% bonus on all savings from the government is a significant contribution to your savings pot, though as you will know, it does not come without its caveats.

Many reading this will be aware that the government has reduced the early withdrawal penalty from 25% to 20%.

While this may be considered a small ‘plus’ for those needing to withdraw their funds to tide them over through this admittedly difficult time, you should remember that 20% is still a significant penalty to incur.

As an example, should you have already saved £5,000 into your LISA, by withdrawing your funds early, you will still lose £1,000 from the total value of your account, which will go directly back to HMRC. My thinking is that even a 20% penalty imposed by HMRC, is still a hefty loss to be dealt – and therefore, perhaps cutting costs and expenditure elsewhere in your budget may be the way to go, depending on your personal circumstances.

Interestingly, and I can’t speak on behalf of other LISA providers, the impression that I have got from speaking with some of our LISA holders is that they actually like the savings element and that their investment is effectively ‘locked-in’ right up to the point that they are wanting to purchase their first home – in this way, it discourages people from touching their investment or being tempted to ‘dip into’ their pot, should the need arise.

My suggestion is that those with a LISA maintain their policy and ‘weather the storm’, or at the most, simply defer or reduce their monthly direct debit payments until such time as they are able to start saving more again.

Like me, many can see that there will become a point when we return to more of a sense of everyday life and normality, at which point, they will really see the true value of having a LISA.

From speaking with some of our LISA holders, it seems to me that they still hold value and trust in their policy, and even those that are experiencing tough times as a result of the ongoing crisis, can see the benefit in maintaining a longer-term savings plan for the future.

On a final note, I would recommend that before taking any major decisions about your LISA, take the time to get independent guidance or advice. Remember, you may need to pay for a financial adviser’s help, so make sure you ask them about their fees first.

Steve Code is director at Unity Mutual