Lifetime ISA withdrawal penalty scrapped

Under-40s will be able to save into a Lifetime ISA (LISA) when they launch in April 2017. The savings accounts means that people aged 18 to 39 can put money away for their first home and for retirement, and they’ll get a Government bonus on this.

And if you withdraw money for any other reason during the first year of the scheme, you’ll can now to do this without any charges. This news came out in a House of Commons debate in December 2016 and it’s likely to make the savings account more attractive to younger people. Let’s take a look at what this could mean for you.

What’s changing?

Financial Secretary to the Treasury Jane Ellison announced the change to the LISA last month. According to Ellison, people will be able save in a LISA, close it and withdraw their cash within the 2017/18 tax year if they want to.

Before this announcement, savers could have missed out if they took money out of the account before they got their Government bonus. The Government will pay this at the end of the 2017/18 tax year, so in after March 2018. And after this, they’ll pay the bonus monthly.

If you withdraw cash for any reason other than to buy a first home before you’re 60, you’ll lose out on 25% of whatever amount you’re taking out. This is the equivalent of the Government bonus so you’ll only get back whatever you paid in. But under the new rules, this won’t apply for the first year of the LISA, as you won’t actually get any bonus in the first year of the account.

This could encourage more young people to open a LISA to save. Before the change to the rules, some young people might have not wanted to get a LISA in case they needed to access the cash and would have lost out.

Should you get a LISA?

If you want to get on the property ladder and start saving for your retirement, the LISA is a great option for you. You’ll be able to get a Government bonus towards your first home and keep saving after this for your pension.

This is great if you’re looking to save for the long term. But if you think you’ll need the money before your 60th birthday for a reason other than a housing deposit, you’ll miss out on the Government bonus. In this case, you might be better saving in a different type of account.

And if you’ve opened a Help to Buy ISA to save for your first home, don’t worry – you don’t need to miss out on the LISA. When the savings accounts launch, you can open one and roll your Help to Buy ISA savings into it.