Since March there has been a steady stream of HM Revenue & Customs (HMRC) and Department for Work and Pensions announcements, all designed to help people, businesses, and the economy.
HMRC recently announced the exit charge on Lifetime ISAs (LISAs) will be temporarily reduced from 25% to 20% for withdrawals between 6 March 2020 and 5 April 2021.
LISAs were launched in April 2017, to help those under 40 save for either a first home or retirement. People can save up to £4,000 a year, and the government adds a 25% bonus.
Unless the individual is withdrawing the money to buy a house or because they are over 60 (or because of death or terminal illness) there’s a 25% charge which recoups the government bonus plus 6.25% of the member’s subscriptions.
We have always felt this charge to be unfair. It was presented as a 25% government bonus on the way in, and a 25% charge on the way out. To most people that sounds even – but it isn’t.
LISA investors losing some of the money they invested simply for withdrawing funds other than in tightly controlled circumstances acts as a disincentive for saving. Reducing the charge to 20% means only recouping the government bonus (plus any growth on that).
For anyone withdrawing funds from a LISA over the next 11 months the charge will simply reduce to 20% (the LISA provider pays the charge).
For those that have already received the money, LISA managers now can claim back the difference between a 25% charge and a 20% charge from HMRC, and credit it back into the investor’s LISA (if still open), direct to the individual.
It is excellent news HMRC is responding quickly to help people. And reducing this charge will help people financially at a time when they really need it. But we hope this is not a temporary measure and HMRC changes its stance and the 20% charge becomes permanent for LISAs.