Martin Lewis warns Lifetime ISA cash not being used must be taken ASAP to avoid 6% penalty | Personal Finance | Finance
Martin Lewis took questions from Radio 5 Live listeners today and a woman named Eileen rang in to ask the Money Saving Expert for his advice on Lifetime ISA withdrawals. Eileen detailed her daughter had saved money into a LISA but she hasn’t been able to work and as such, she’d like to “cash it in” before April 6.
Eileen asked Martin if she’d be able to get a 25 percent bonus if she withdraws money or if she’d just get back what she originally put in.
In response, Martin detailed Eileen raised a “very important spring deadline question.”
Martin explained: So, here’s how it normally works on a lifetime ISA. You put the money in each month and you’d get the 25 percent bonus added to your account.
“If you choose to withdraw it for any reason other than what it’s intended for, which is a first time buyer buying the qualifying property or towards retirement, there’s normally a 25 percent penalty so you put in you get 25 percent bonus, when you take it out you pay 25 percent penalty.”
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Martin warned that while the “maths” on this sounds equivalent, savers would actually lose up to 6.25 percent if they withdraw early.
However, in light of coronavirus the Government changed the rules on LISA withdrawal penalties and Martin continued by explaining how the new rules work in practice: “[The Government] have changed the penalty to 20 percent, So 25 percent going in 20 percent coming out, what that actually means is you get what you put in back, you don’t lose anything you don’t get the bonus, but you get what you put in back without a penalty.
“But that ends on April 5, and in fact for many accounts that have LISA, to practically withdraw the money you’re going to need to do it today or tomorrow.
“By the weekend, you won’t get the money out in time so you’ll pay a penalty.
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“So anyone who has a LISA who is not going to use it as a first time buyer and doesn’t want to keep it until they’re 60, you need to be withdrawing the money today or tomorrow or you will face a 6.25 percent penalty.”
Savers across the UK will be reviewing their ISAs over the coming days as new accounts can be opened and contributed to as the new tax year starts.
For Lifetime ISAs, a saver must be aged between 18 and 40 to open a new account.
Once opened, people can put up to £4,000 each year into a LISA until they reach 50.
For the coming tax year, up to £20,000 can be invested into the four main types of ISAs.
This includes cash, stocks and shares, innovative finance and Lifetime accounts.
Savers must be aged between 16 and 18 to open these accounts and they must also be resident in the UK or a Crown servant (or have their spouse or civil partner be one) if they do not live in the UK.
Junior ISAs can also be opened for children aged under 18 but these have a savings limit of £9,000.
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