People who have suffered financially as a result of coronavirus and who may want to access their Lifetime ISA funds early won’t be hit by an additional withdrawal penalty, the treasury has confirmed.

Ordinarily, anyone accessing their Lifetime ISA cash early would face a 25% penalty on the whole amount, including the government bonus. It meant they would get back less than they put in and was to disincentivise people from using the funds other than buying a first home or for later life. See YourMoney.com’s Lifetime ISA guide for more information.

But economic secretary to the treasury, John Glen, has confirmed that the temporary rule change applied to withdrawals made between 6 March 2020 and 5 April 2021, means Lifetime ISA savers will get back all the money they originally deposited (subject to investment losses on stocks and shares ISAs).

As an example, someone putting in the maximum £4,000 into a Lifetime ISA would receive a 25% (£1,000) bonus from the government, taking the balance to £5,000.

Previously, if they withdrew their funds early, they would be charged 25% of the balance, which recoups the government bonus plus an additional charge (equivalent to 6.25% of the money they put in). As a result, the excessive penalty would mean they would receive £1,250 less so £3,750.

Given the temporary rule change taking the charge to 20% rather than 25%, the government will take back just the original £1,000 bonus, returning the full £4,000 deposited (subject to investment losses).

Carol Knight, COO at The Investing and Saving Alliance (TISA), explains that the reduction means that only the government bonus and any interest on that will be repaid. Any interest earned on the saver’s original deposits will not be deducted.

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The Treasury confirmed that as the rule change will be backdated to 6 March, anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.

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.”