1,510 individuals with Lifetime ISAs paid an average penalty of £695, between April 2017 and April 2019. They got these fines by withdrawing money from their ISAs before the agreed deadline.

If you are investing in a Lifetime ISA you need to be absolutely sure about its restrictions, so that you can be certain of its benefits for your personal situation. These tax free savings opportunities are great if you can commit to all their rules.

What is a Lifetime ISA?

A Lifetime ISA is designed for people aged between 18 and 40, to save for a pension or house deposit. You can save up to £4,000, tax free, every year and the government give you an additional top-up of 25% of this amount. So if you save £800 in a Lifetime ISA, you get an extra £200 from the government. A nice total of £1,000 in that tax year.

Once you reach the age of 50, you cannot pay any more into your Lifetime ISA, but it stays open and you receive investment returns or interest on your savings.

You must be a UK resident or crown servant to be eligible. The amount in your Lifetime ISA is part of your annual ISA limit, which was £20,000 in the 2019-20 tax year.

A Lifetime ISA must be spent on:

  • A deposit for your first home
  • After your 60th birthday

If you develop a terminal illness and have a prognosis of less than a year, you are also able to withdraw your money without any penalties.

When do you get penalties for withdrawing your money from a Lifetime ISA?

You must pay a 25% penalty charge to HMRC if you take money out of your Lifetime ISA before you are 60 years old, or to pay for anything other than a house deposit. It is not a short term savings situation.

The Lifetime ISA is the only government supported savings product that is specifically for buying your first home. The 25% fine is the government’s way of recouping its 25% top-up when you spend the money on something other than your mortgage.

This could mean that an early withdrawal leaves you with less than you started with.

For example: you have the previously mentioned £1,000 total in your Lifetime ISA, and you need all of it to cope with an emergency. You first have to repay the 25% fine, that’s £250, leaving you with £750. Considering that your initial investment was £800, you are now £50 worse off than when you started saving.

Unforeseen circumstances arrive at all our doors and often require financial outlay to resolve them. But using your Lifetime ISA money for these situations is extremely inefficient. Perhaps getting rid of the fine would encourage more uptake of the Lifetime ISA scheme and take away the element of feeling punished for having a sudden, unavoidable expense to pay for. Until that happens, it is important that everyone takes this into consideration when they are deciding which savings option is best for them.