LIFETIME ISAs have proved a popular savings method for many Britons who are putting money away towards specific goals. However, when managing this kind of account, there is an important rule to bear in mind.
Lifetime ISAs, commonly known as LISAs, are frequently used by individuals who are saving towards important milestones. Specifically, the account can be used to purchase a first home, or to save for later life. To be eligible to open a Lifetime ISA, a person must be 18 or over, but under the age of 40.
Those saving into a Lifetime ISA can put in up to £4,000 each year under current rules, until reaching the age of 50.
But the incentive for saving in this way is undoubtedly the government bonus available.
The government states it will add a 25 percent bonus to any savings in a Lifetime ISA account, up to a maximum of £1,000 per year.
It is as a result of the attractive government bonus that Lifetime ISAs have been taken up by large numbers of people right across the country.
Those who are looking to boost the amount they save to reach their goals are likely to find success through such a savings method.
However, there is one important rule when it comes to a Lifetime ISA that it is vital for savers to bear in mind.
This rule relates to withdrawals, and if not heeded, it could end up proving costly.
People who save into a Lifetime ISA are only allowed to make withdrawals in these circumstances:
The government website explains: “You’ll pay a withdrawal charge if you withdraw cash or assets for any other reason.
“This is also known as making an unauthorised withdrawal.
“This recovers the government bonus you received on your original savings.”
There is, however, a slight adjustment due to the COVID-19 crisis that is set to last for a few months more.
The charge traditionally stands at 25 percent, however it has been slightly reduced to 20 percent during this difficult financial time.
It will, however, return to its standard amount on April 6, 2021.
If a person has made an unauthorised withdrawal since March 6, 2020 and they have been charged at the old rate, the different will be paid back into their Lifetime ISA.
The rule about withdrawals is particularly important to bear in mind as it has already proven particularly costly for Britons.
In the 2018-19 tax year, a staggering total of £4.35million was paid in Lifetime ISA penalties, which averaged out at £362,500 a month.
The penalty, the government has explained, is to stop Britons using the LISA as a short-term savings product.
Savings however can be taken out of a Lifetime ISA when a person reaches the age of 60.
However, the charge will still apply if a Lifetime ISA is transferred to another type of ISA before 60.
Lifetime ISAs have been on the market since 2017, and are often viewed as another alternative to the similar Help to Buy ISA government scheme.