On 6 April 2021 the withdrawal charge on Lifetime Isas reverted to 25 per cent, having been payable at a reduced rate of 20 per cent since 6 March 2020.
The charge is intended as a deterrent to those accessing their Lisa for a purpose other than that the product is designed for – namely first-time house purchase or income in retirement – and at the 25 per cent rate includes a penalty as well as recouping the government bonus.
So, who should consider a Lisa and how does it work?
A Lisa can be opened by any UK resident (or UK Crown employee) from their 18th birthday until the day before they turn 40. Importantly the Lisa must also be funded before their 40th birthday – so opening an account but not paying any money in until after the big 4-0 does not work. Like most Isa types you can only open and fund one in each tax year, although there is no limit on how many you can hold.
How does the bonus work?
All payments made into a Lisa receive a 25 per cent bonus. Up to £4,000 can be paid each tax year – so a maximum bonus of £1,000 will top that up to £5,000 in the account which can be invested.
It is important to note that the £4,000 limit sits within the overall £20,000 Isa allowance, not on top of it. So, if the full Lisa allowance is used, there is £16,000 left that can be paid into other Isas such as a Stocks and Shares or Cash ISAs.
It is also possible to transfer in monies from other Isas to a Lisa, up to the £4,000 a year and get the bonus. This will use up the Lisa allowance, but does not use up any of the £20,000 overall Isa limit as the monies were already in an Isa wrapper. Just remember that, as with any Isa transfer, you can not split current year subscriptions.
The Lisa manager will automatically request the 25 per cent bonus from HMRC on the 6th of the month for all money paid in in the previous month. The bonus is received four weeks after that, meaning bonuses will be received into the account between four to eight weeks after money is paid in, depending on the date the subscription was made.
There is no option to pay more than £4,000 into a Lisa and not get the bonus – everything that goes in must qualify (except for Lisa to Lisa transfers).
Although it is only possible to open a Lisa before turning 40, once open payments can continue until the day before the 50th birthday. This means if someone opened a Lisa at age 18 and paid in the maximum of £4,000 each tax year until they turned 50, they could claim a grand total of £33,000 in government bonuses (unless their birthday is 6 April).
Those approaching their 40th birthday who are unsure whether they want to open a Lisa may want to consider opening an account with a minimum subscription just to keep the option open to pay in in the next ten years.