LISA penalty

dizzeedollee

Hi all,

I'm wanting to open a S&S LISA as I'm planning on (one day!) purchasing my first property. I came across the following on the MSE website and I'm slightly confused by this:

• What happens if my purchase completes before I get the bonus?

  If your property purchase completes before you get the bonus (which can take four to nine weeks to arrive in your account) then you'll have to pay the 25% withdrawal charge to access the money.

As far as I understand it, the bonus is paid monthly so if it takes between 4-9 weeks for the bonus to arrive after each monthly deposit into the LISA then you will always have to pay this penalty. Am I completely missing something here?! Does this mean I should only deposit once a year and then wait for the bonus to arrive before using it to purchase my first property?

masonic

There are a few issues here:

1) You are proposing to use a S&S LISA to one day purchase your first property. But if you are planning to buy within say the next 10 years, investments would be inappropriate due to the short holding period. If you don't envisage buying for >10 years then a S&S LISA might be appropriate providing you accept that you may need to delay your purchase for a few years if there is a crash around the time you want to buy.

2) The bonus is paid a month or two after you make a contribution, so if you are planning to "one day" purchase your first property, there will be plenty of time for contributions made this year, or next year, or even the year after to receive their respective bonus payments. It is only a contribution you make in the weeks leading up to your house purchase that run the risk of not receiving a corresponding bonus payment into the LISA by the time you need to make the penalty free withdrawal. This can easily be avoided by ensuring any contributions for that tax year in which you are buying are made promptly and well before your intended completion date.

3) The consequence of a bonus payment being received too late is not generally that you have to pay the penalty - it may be physically too late to use this money towards your home. At that point you have two options: you can either leave that money in the LISA and use the LISA for retirement, or you can close the LISA and receive that small part of the overall bonus minus the withdrawal penalty.

Alexland

The text could be clearer - if your solicitor made a full balance withdrawal to support a qualifying property purchase before a bonus was added then your LISA account should not be closed but go to zero then later the bonus would be added and there might be some interest due too if it was a Cash LISA (suitable for most FTB purchases).

Now if you then went on to close the account and withdraw the balance (before age 60) the penalty would apply to the withdrawn amount. Alternatively you could continue to invest (with bonus on new contributions) via a S&S LISA until age 50 for penalty free withdrawal from age 60.

With a LISA there is no reason to limit your contributions to a monthly pattern so as you approach the purchase you may choose to try and get your contribution(s) for that tax year in as early as possible so you can get the full bonus (and interest) in advance of the property purchase later in the tax year and the account could be closed as part of the withdrawal.

Of course if you are over 40 when the purchase happens you might want to deliberately keep the account open by asking your solicitor to do a partial withdrawal leaving a balance after the purchase as you would not be able to open another LISA.