LISA penalty reduction question

Racxie

Hi all,

As some of you may be aware the penalty for withdrawing the cash from your LISA had been brought down to 20% from 25% until the end of this current tax year due to the pandemic.

I currently have a LISA with Nutmeg and they've told me that I need to wait until this month's bonus has been paid until I can withdraw it which is fair enough, but they've also told me that the penalty will be on the whole amount (i.e. any interest gained), not just on the government bonus.

I have now replied pointing out that on the government's website regarding this change it states:

"This means that LISA investors will only lose the government bonus earned on the amount they withdraw."

I've highlighted what I believe is the key word here, especially as the page does not mention anything about the interest being affected by the penalty and keeps only referring to the bonus being lost (as does every MSE article).

I regret not having done this sooner, but while I'm waiting for them to reply I'd be curious to know if anyone else has run into the same issue and whether they have a leg to stand on?

Source: https://www.gov.uk/guidance/lifetime-isa-withdrawal-charge-reduced-to-20#how-this-affects-investors

Alexland

Yes it's poorly worded the 20% withdrawal penalty will impact both the bonus and growth on the bonus.

Racxie

Thanks, although I'd like to know if you can link to anything that confirms this? Because as of right now I'm sure if this would go to court (not that it'd be worth the hassle in my case), that to me is pretty clear cut and doesn't leave for any ambiguity.

MDMD

Racxie said:

Thanks, although I'd like to know if you can link to anything that confirms this? Because as of right now I'm sure if this would go to court (not that it'd be worth the hassle in my case), that to me is pretty clear cut and doesn't leave for any ambiguity.

The court would ignore the poorly worded guidance and look at the legislation which is here in paragraph 8(2)

https://www.legislation.gov.uk/ukpga/2017/2/schedule/1/enacted

(2)An amount, equal to the total of—

(a)the specified percentage of so much of the withdrawal as is a withdrawal of sterling, and

(b)the specified percentage of the market value of the rest (if any) of the withdrawal,

The “specified percentage” is 20% (for now)

https://www.legislation.gov.uk/uksi/2020/506/made

So, in short whatever you withdraw, is subject to the charge. 

Racxie

Thanks, although it's appalling just knowing that if this was a private company they'd likely have sided with because of the way the wording is clearly presented to the average consumer on the government's own website (e.g. me), but because it's the government they're above their own rules and aren't regulated in the same way private companies are (as we've seen with the student loan fiasco).

If I was losing thousands as a result of this I'd still likely try to fight it, but as I'm only losing a few hundred it's unlikely to be worth it. Just wish it had been clearer from the start (including MSE's guide, although I've just noticed they've clarified that the amount you'll lose varies with a S&S LISA (although it seems to suggest that you'll get to keep the interest from a cash ISA?).

MDMD

The government website (gov.uk) is notorious for sacrificing accuracy for brevity and simplicity. Unfortunately tax rules are not simple and the devil is in the detail. 

The legislation website is also frequently out of date, so it’s often a case of tracking through the Individual acts and statutory instruments. You won’t, for instance, find an up to date version of the ISA regulations containing the 20% penalty, you have to piece it together from the two separate amendments.

Alexland

Racxie said:

If I was losing thousands as a result of this...

But how would you be losing anything as a result of this? The current 20% penalty is putting you in exactly the same position as if you had used a normal savings or investment account - your money is being returned with associated growth. Be glad it's not the normal 25% penalty. It's unreasonable to expect to keep the growth on a bonus that was not earned because the LISA was not used towards a qualifying purchase or kept until age 60.

I've just noticed they've clarified that the amount you'll lose varies with a S&S LISA (although it seems to suggest that you'll get to keep the interest from a cash ISA?).

20% withdrawal penalty has the same effect regardless of if the LISA is in Cash or S&S. It's just that a Cash product has a more predictable interest rate and a S&S product has investment gains or losses. Either way you get 80% of your money back.

Racxie

MDMD said:

The government website (gov.uk) is notorious for sacrificing accuracy for brevity and simplicity. Unfortunately tax rules are not simple and the devil is in the detail. 

The legislation website is also frequently out of date, so it’s often a case of tracking through the Individual acts and statutory instruments. You won’t, for instance, find an up to date version of the ISA regulations containing the 20% penalty, you have to piece it together from the two separate amendments.

And this is the problem with the government. If it was a private company and this went to the ombudsman they'd side with the customer because the wording is clear to the layman that the penalty should only be on the bonus, not on any interest gained.

Racxie

Alexland said:
But how would you be losing anything as a result of this? The current 20% penalty is putting you in exactly the same position as if you had used a normal savings or investment account - your money is being returned with associated growth. Be glad it's not the normal 25% penalty. It's unreasonable to expect to keep the growth on a bonus that was not earned because the LISA was not used towards a qualifying purchase or kept until age 60.

When you put it like that it does makes more sense, although if this had been clearer from the start I'd probably have reconsidered whether taking out a LISA would have been worth it in the first place. The government's website is still incredibly poorly worded and misleading though.

20% withdrawal penalty has the same effect regardless of if the LISA is in Cash or S&S. It's just that a Cash product has a more predictable interest rate and a S&S product has investment gains or losses.

Thanks, again this makes sense. The MSE guide just doesn't explain it too well, although can't fault them just being third party guidance rather than an official source.