Savers considering a Lifetime ISA ("LISA") should be wary of hefty exit penalties that could leave them out of pocket if money is withdrawn early.
Suzanne Briggs, Director at Blick Rothenberg, said: “Eligible savers wanting to open a cash LISA are now finally able to do so, with the first provider coming to the market, but the LISA comes with a ‘health warning’ meaning that savers could be getting back less than what they put in.”
The LISA was launched on 6 April 2017, but the first (and only) cash LISA, offered by the Skipton Building Society, has only just come to the market. Anyone aged between 18 and 39 can open a LISA, and once they are over 40, they can continue to contribute to it until their 50th birthday.
The LISA is different to a normal ISA in that the Government gives a 25% bonus for what you put in, and just like a normal ISA, income and capital gains within the LISA are tax-free. For example, if an individual contributes £1,000 to a LISA, the Government will add a £250 bonus so the saver will have £1,250.
Suzanne said: “However, the LISA may not be appropriate for everyone. The savings are locked away until you turn 60, unless you use the money to buy your first property. If you withdraw the money for any other reason a 25% exit penalty applies on the amount you take out.
“For example, if you contribute £4,000 to your LISA and receive the 25% Government bonus, your LISA is worth £5,000. If you need the funds unexpectedly and withdraw all the cash, the 25% penalty is applied and you only receive £3,750 back. This is £250 less than what you put in!”
She added: “The annual interest rate on the recently launched Skipton Building Society LISA is set at 0.5%, and so the tax-free interest return is unlikely to be enough to cover the penalty.
“Care and financial advice should be taken when considering whether to tie up valuable savings in a LISA, and savers need to be very aware of the impact of the penalties as they could be left worse off.”
For more information please contact Suzanne Briggs.