Lifetime ISA question

musashi10

Hi there.

My father passed away this year, as such I inherited part of a property. 

I have never bought a property before and the sols advised that because I had an interest in the property I would no longer be deemed as a first time buyer.

However, I was saving for a deposit on a house via a lifetime isa.

My question is, what happens now to this ISA?

Is it eligible to withdraw?  Or do I now have to just leave it until I retire?

Thank you

bowlhead99

You have the choice of leave it until age 60, when you can withdraw it without penalty, or withdraw it now and pay a penalty.

If you want to withdraw it, fortunately the government has temporarily reduced the penalty on withdrawals to help ease the pain and hassle of Covid.  So the penalty for withdrawing it this tax year (i.e. by 5 April 2021) is only 20% of the amount withdrawn, reduced from the usual 25%.

This means the penalty will only cost you as much money as you had previously made from the effect of the government bonus - e.g. put £4k into the LISA, get a £1k bonus to create a £5k balance ; then when you withdraw £5k and pay a 20% penalty on it, you'll be left with £4k again.

If you want to keep the bonus and use the funds to withdraw age 60+, penalty-free, it might still be a good option to do that, but you could alternatively contribute more to your pension instead which might be a better or worse option depending on your personal tax position.

If you were going to leave it for retirement you would be best to transfer it into a S&S type of LISA which invests in investment funds (as if you used a cash ISA for such a long-term objective, the value would not grow very much and would be worth a lot less in real-terms due to the effects of inflation). 

musashi10

Hi thank you.

Just to confirm this was in shares. So, do the government also take 20% of the profits made as part of the penalty charge on withdrawal?

And if I decided to keep it open, could i still contribute to it until i'm 50? 

eskbanker

musashi10 said:

Just to confirm this was in shares. So, do the government also take 20% of the profits made as part of the penalty charge on withdrawal?

Effectively, yes, it's 20% of the (gross) amount withdrawn, however that happens to be constructed.

Edit: and yes, you can keep contributing to 50 if you don't close it down.

musashi10

eskbanker said:

musashi10 said:

Just to confirm this was in shares. So, do the government also take 20% of the profits made as part of the penalty charge on withdrawal?

Effectively, yes, it's 20% of the (gross) amount withdrawn, however that happens to be constructed.

Edit: and yes, you can keep contributing to 50 if you don't close it down.

Thank you