Millions of Britons facing a cost-of-living crunch have been withdrawing funds from their Lifetime ISA (LISA) accounts and incurring significant penalty charges, as a result.

According to HM Revenue & Customs (HMRC), a record 77,500 LISA savers were issued over £33 million worth of early withdrawal charges in 2021/22.

Early withdrawal from LISAs attracts a 25 per cent penalty, on the amount being withdrawn.

During the pandemic, the Treasury reduced the charge from 25 per cent to 20 per cent, to ensure those accessing their LISA, while facing serious hardship, were not unfairly penalised. However, this ended on 6 April 2021.

Investors who withdraw £1,000 from their LISA will lose the £250 (25 per cent) government bonus earned. The value of their LISA will consequently be reduced by £1,250. The LISA provider will repay the £250 government bonus back to HMRC.

What are LISAs?

  • You can use a LISA to buy your first home, or to save for later life. You must be 18 or over but under 40 to open one.
  • You can deposit up to £4,000 each year until you’re 50. You must make your first payment into your ISA before you’re 40.
  • The Government will add a 25 per cent bonus to your savings, up to a maximum of £1,000 per year.
  • The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2022/23 tax year.
  • You can hold cash or stocks and shares in your Lifetime ISA or have a combination of both.

Although the benefits of leaving LISAs untouched are considerable, they can be accessed in an emergency.

As inflation approached double figures in April, around 9,000 savers decided to accept the penalties to take their money out early.

In total, LISA savers made unauthorised withdrawals worth over £14 million, the highest figures for the year.

Is a LISA right for me?

If you are a first-time buyer, or think you might be in the future, or you want to save for retirement, it may be worth considering a LISA. However, depending on your circumstances, the limitations and charges that come with a LISA may be at odds with your requirements and so there may be a more suitable alternative available.

It would be wise to consult your accountant or adviser, who can discuss your requirements and support you to identify the most tax-efficient home for your savings.

To talk to one of our expert tax advisers in Cambridgeshire, Bedfordshire or Hertfordshire, contact us today.

Share to