- Contributions to a lifetime ISA
- Withdrawals from a lifetime ISA
- Reduction in the non-qualfying withdrawals penalty 6 March 2020 to 5 April 2021
Contributions to a lifetime ISA
A lifetime ISA can be opened by UK resident individuals aged between 18 and 40 years old. The savings may be kept in cash or investments and the growth is tax-free.
SI 1998/1870, regs 8ZA, 12B(4)(c)(d)
Where the individual saves up to £4,000 each tax year up to the age of 50, the Government will contribute a 25% bonus at the end of the year. Savers can contribute more than £4,000 in a year (up to the ISA allowance for the tax year), but the bonus is limited to £1,000. Contributions to a lifetime ISA are taken into account for the purposes of the annual ISA allowance.
SI 1998/1870, regs 4ZA(1A), 10A(2), 12B(4)(b), Sch
For full details of the lifetime ISA, see the Lifetime ISAs and help to buy ISAs guidance note.
Withdrawals from a lifetime ISA
The funds in a lifetime ISA may only be withdrawn:
- to purchase a first home in the UK of up to £450,000 (funded by way of a mortgage), but only after the lifetime ISA has been opened and funded for at least a year
- from the age of 60, for any purpose
- to transfer the funds into another lifetime ISA
- where the individual has a terminal illness and is expected to live less than one year (the ISA manager requires written evidence from a registered medical practitioner)
SI 1998/1870, Sch, paras 4, 6
Non-qualifying withdrawals before the age of 60 are possible, but a penalty of 25% of the amount withdrawn will apply. This is more than the Government bonus, ie a lifetime ISA investment of £4,000 attracts a £1,000 bonus, but if the investor then takes out £5,000 from a lifetime ISA, the 25% penalty amounts to £1,250.
SI 1998/1870, Sch, para 5
Reduction in the non-qualfying withdrawals penalty 6 March 2020 to 5 April 2021
The penalty is reduced to 20% for non-qualifying withdrawals made between 6 March 2020 and 5 April 2021. Therefore, in the example above of the lifetime ISA containing £4,000 plus £1,000 bonus, if the individual takes out £5,000 between these dates, the penalty would be £1,000 rather than £1,250. See the GOV.UK website.
Although this would appear to put the individual back on level footing with the original bonus received (ie bonus of £1,000 and penalty of £1,000 in the example above), this is not the case. What if that original £5,000 in the lifetime ISA was invested in shares and the account had grown to £15,000 (say) and the full £15,000 was withdrawn before 6 April 2021? The penalty would amount to £3,000 (£15,000 x 20%) compared with the original bonus of £1,000.
As such, when deciding which savings to draw on during the pandemic, it is important that taxpayers check early withdrawal penalty terms carefully, as it is likely to be better to first access savings from accounts without withdrawal penalties. Advisers who are contacted by clients in this regard are reminded that helping clients to decide which savings to access constitutes investment advice and so should be given only by those authorised to do so. See the Regulated investment advice guidance note.
For guidance for ISA managers who had already deducted a 25% penalty on non-qualifying withdrawals made between 6 March 2020 and 1 May 2020 (the date the change was published), see the GOV.UK website.
Non-qualifying withdrawals from a lifetime ISA that take place after 6 April 2021 attract a penalty at the previous rate of 25%.