The lifetime ISA government withdrawal charge - explained
If you don't use your lifetime ISA the way the government intended, you'll have to pay a 25% government withdrawal charge.
Lifetimes ISAs are a great way to save for your first home or for life after 60. That’s because you get a generous government bonus on top of the money you put in – up to £1,000 each tax year!
But if you don't stick to the lifetime ISA rules you’ll have to pay a withdrawal penalty. This could mean you end up with less money than you put in.
Read on to find out more about how this charge actually works, so you don’t get caught out.
What is the lifetime ISA withdrawal charge?
If you make an ‘unauthorised’ withdrawal from your lifetime ISA, you’ll have to pay a charge, which is 25% of the amount you withdraw.
First off, an unauthorised withdrawal sounds scary. What is it?
A withdrawal is unauthorised if it means you use your lifetime ISA funds in a way the government didn’t intend.
The following would count as unauthorised withdrawals:
- Making a withdrawal within 12 months of making your first payment into your lifetime ISA.
- Using your lifetime ISA for something other than your first home (although, from your 60th birthday you can use the money however you want).
- Using your lifetime ISA to buy a home that costs more than £450,000.
- Not using a mortgage to buy your home.
- Buying a property you don’t intend to live in.
- Not using a conveyancing solicitor to act for you in the property purchase (the lifetime ISA provider will pay the funds directly to them).
If any of the above applies, you’ll be charged the lifetime ISA withdrawal penalty when you take out your money.
The exception is if you’re diagnosed with a terminal illness, in which case you can access your money without being penalised. But you must contact your provider to arrange to get your money.
You can read our lifetime ISA rules article for an in depth look at the rules you need to stick to, to avoid being charged for withdrawals.
How the lifetime ISA withdrawal charge works
We’ve covered when you might have to pay the charge. Now let’s look at how it could hit your wallet.
A common mistake is thinking the charge just takes away the government bonus paid into your lifetime ISA, but it’s actually higher.
As the charge is 25% of the amount you withdraw, it means you could also lose some of the money you’ve paid in. This is because the amount you withdraw is a combination of money you’ve put in, the government bonus, and any interest or growth.
So, you’ll have to give back all the government bonus you've received, plus 6.25% of your own money on top of that.
Examples of how the government withdrawal charge works
| Example 1 - Full withdrawal | ||
|---|---|---|
| You | The government | How much money you have |
| Open a lifetime ISA with £2,000 | £2,000 | |
| Adds the 25% bonus (£500) | £2,500 | |
| Withdraw all your money | Charges you 25% of everything you withdraw (£625) | £1,875 |
In the example above, you’d lose the bonus you gained, plus £125 of your own money.
If you only want to withdraw some of your lifetime ISA savings, you’ll still be charged the 25% withdrawal fee. But it works a bit differently, as per the example below.
| Example 2 - Partial withdrawal | ||
|---|---|---|
| You | The government | How much money you have |
| Open a lifetime ISA with £2,000 | £2,000 | |
| Adds the 25% bonus (£500) | £2,500 | |
| Decide you want to withdraw £200.
This means you actually need to withdraw £266 to cover the withdrawal fee |
Charges you 25% of what you withdraw (£66) | £200 in your pocket (£2,234 left in your lifetime ISA) |
The example above can be confusing because you might expect to pay just 25% of the £200. But remember, it's 25% of everything you withdraw. This includes the money for the fee itself.
How does growth or interest affect the withdrawal charge?
The examples above assume there was no investment gain or interest. But what if your money grows more than the 6.25% loss on the money you put in?
If you have a stocks and shares lifetime ISA, your money is invested in funds that buy various different types of investments: things like shares in companies, property and corporate and government bonds. The value increases (or decreases) as the value of these assets change.
With a cash lifetime ISA, your money grows by a percentage of how much you have saved. The exact percentage depends on interest rates, which are typically variable so they can go up and down.
The example below shows how 7% investment growth could affect the amount you end up with after the withdrawal charge is applied. Investment returns aren’t guaranteed and 7% is given only as an example. The value of a stocks and shares lifetime ISA is likely to go up and down.
As a general rule, the longer you have your LISA money invested before a chargeable withdrawal takes place, the less likely you are to be in a negative position following a withdrawal charge as your money would have had more time to grow.
| Example 3 - 7% annual growth in a stocks and shares lifetime ISA | ||
|---|---|---|
| You | The government | How much money you have |
| Open a lifetime ISA with £2,000 | £2,000 | |
| Adds the 25% bonus (£500) | £2,500 | |
| Gain 7% investment returns (£175) | £2,675 | |
| Withdraw all your money | Charges you 25% of everything you withdraw (£668.75) | £2,006.25 |
In this example, your early withdrawal costs you £668.75. So you lose your £500 bonus, but as you’ve gained more than 6.25% in investment returns, you’ve gained slightly more than you paid in.
Why does the lifetime ISA withdrawal penalty exist?
The lifetime ISA was designed for two specific purposes:
- To get people onto the property ladder.
- To help people boost their pot of money for later life.
The government withdrawal charge is there to put people off using a lifetime ISA for anything else.
As you can technically access your money at any time, the withdrawal charge can act as a deterrent – great if you struggle with willpower when it comes to keeping your money locked away!
How can I avoid paying the government withdrawal charge?
Quite frankly, to avoid paying the lifetime ISA withdrawal charge you need to use your lifetime ISA the way the government intended. This means either wait until you’re 60 or instruct your conveyancing solicitor to withdraw the money to buy your first home.
It’s also worth considering if you’re likely to buy a house within the next 12 months. Remember, you’ll be charged if you withdraw your money within 12 months of your first payment into your lifetime ISA.
Having an emergency fund is also a good idea, to reduce the likelihood of needing to take money out.
OneFamily's Lifetime ISA
Lifetime ISAs aren’t for everyone. But if you meet the eligibility criteria and plan to use the money the way the government intended, they can help you build your first-home deposit, or extra money for retirement, faster.
Our Lifetime ISA invests in stocks and shares. This means it has good potential to grow, but the value of your investments could go up as well as down, and you could get back less money than you’ve put in.
Saving for something other than a first home? Take a look at our Stocks and Shares ISA.
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