You could be getting back less than the savings you initially put in your new Lifetime ISA (LISA) if money is withdrawn early, warns leading accounting, tax and advisory practice Blick Rothenberg.
The new LISA becomes available tomorrow, 6 April, and is targeted at 18 to 39 year old savers. It is a tax-free savings vehicle, but it is only permitted to be used for a first time buyer’s home deposit or retirement.
Suzanne Briggs, Director at Blick Rothenberg, said: “The LISA may not be appropriate for everyone due to the exit penalties if money is withdrawn for any other reason other than those permitted. If you need access to the cash after April 2018, you will pay a 25% exit penalty.
“So for example, if you put in £4,000 and receive the 25% government bonus, your LISA is worth £5,000. You need the funds for a financial emergency so you withdraw the cash, but after the 25% exit penalty is applied, you only receive £3,750 back. Even if the value of the fund grows steadily at the rate of say 4%, the impact of the exit penalty could mean that you would get back less than the growth in value of the fund!”
Suzanne added: “Care and financial advice should be taken when considering whether to tie up valuable savings in a LISA. Many banks are not willing to launch their own LISA onto the market just yet and so time will tell whether these will be as popular as the Help to Buy ISA. Hopefully, in the meantime, there will be a rethink as to the financial consequences of the exit penalties.”
“Although the LISA is designed to work alongside pensions, those seeking to save for retirement may be better off maximising their pension contributions in the first instance. Those who may need the money or are unsure about their medium to long term financial needs should consider other forms of tax free savings such as flexible ISAs, to avoid the risk of having to pay hefty penalties.”
For more information please contact Suzanne Briggs at email@example.com