Permanently reduce the Lifetime ISA - withdrawal penalty?

masonic

Thrugelmir said:

For lenders it's not the penalty itself, but the increased level of activity it would create. Employing people is very expensive. Particularly at a time when cutting costs is a primary objective. 

Yes, I suppose it would lead to increased overheads wrt monthly bonus claims if people were depositing and withdrawing money more frequently. Although I guess providers would be at liberty to use the same mechanisms they do with fixed term cash ISAs to discourage churn.

Alexland

masonic said:

While most people may intend to use the account for a house purchase, a significant number are using a S&S LISA for retirement.

And some of us are using our LISAs to accumulate deposits for our kids to buy property! Now we have invested enough for the kids, and switched to interest only on our own mortgage, our LISAs might also be used to pay off the final balance on our own home (again not an intended purpose) although it seems more likely we will do this from pension TFLS, inheritance, redundancy etc.

[Deleted User]

masonic said:

Deleted_User said:

masonic said:

Deleted_User said:

masonic said:

I'm ambivalent towards the penalty. Rates on cash LISAs have typically been low, so people are have already penalised when using them as normal savings accounts, and S&S LISAs are not suitable to be used for short term savings. On the other hand, the small net ~6% penalty may serve a purpose as a deterrent from cashing in your LISA funds for frivolities.

We get 1K bonus a year with 4k in a year, can't really beat that!

As per the thread title, the penalty for withdrawals made before age 60 that don't go towards a first time property purchase is 20% rising to 25% at the end of the tax year. The 20% penalty wipes out the £1k bonus, while the 25% penalty results in you getting back less capital than you paid in.

Yes but anyone getting the account is unlikely to withdraw for any other reason than buying a home. For the majority it is a great account.

This thread is specific to withdrawals that do incur the penalty. While most people may intend to use the account for a house purchase, a significant number are using a S&S LISA for retirement. Anyone could be put into an adverse position where they have to consider making a withdrawal for other reasons. The reason for reducing the penalty to 20% from 25% was that Covid made that very situation more likely. So, as I first commented: "Rates on cash LISAs have typically been low, so people are have already penalised when using them as normal savings accounts" [i.e. not for retirement or house saving]

At no point have I suggested these are not good accounts in cases where they are used for the intended purposes.

Thrugelmir said:

If there was no penalty. Then providers would be less reluctant to offer the product. Administration costs money. People would be cashing in for all sorts of reasons. 

The penalty is paid to HM Treasury. I don't think the providers get a share of it. Perhaps you mean the penalty puts people off opening an account in the first place, but it seems like the lack of popularity of LISAs has been part of the reason why providers are reluctant to offer them.

Yes but I don't understand the "Rates on cash LISAs have typically been low", surely the bonus can be included as a bonus rate.

What is a normal saving account? lots of savers have restrictions on withdrawal. A LISA is just a savings account, with penalty if you decide your money back. Sure it is a far harder penalty but still follows the normal foundation of a savings account. You put money in, you get interest, you want it back early, you lose the interest. (and in the case of an LISA a bit of your money).

epm-84

veryintrigued said:

Plenty of the fixed term accounts I hold have a penalty clause attached. I'm not aware these are about to be changed.

The current penalty is government imposed. If you have a fixed rate account with a loss of interest penalty for withdrawals that's because your bank/building society has imposed that term themselves, not because the government has told them to do it.

There was a change to Cash ISAs a few years back where the government allowed 'flexible ISAs' to be introduced.  It's up to the ISA provider whether or not they make their products flexible but the government made the option available.

epm-84

[Deleted User] said:

masonic said:

[Deleted User] said:

masonic said:

I'm ambivalent towards the penalty. Rates on cash LISAs have typically been low, so people are have already penalised when using them as normal savings accounts, and S&S LISAs are not suitable to be used for short term savings. On the other hand, the small net ~6% penalty may serve a purpose as a deterrent from cashing in your LISA funds for frivolities.

We get 1K bonus a year with 4k in a year, can't really beat that!

As per the thread title, the penalty for withdrawals made before age 60 that don't go towards a first time property purchase is 20% rising to 25% at the end of the tax year. The 20% penalty wipes out the £1k bonus, while the 25% penalty results in you getting back less capital than you paid in.

Yes but anyone getting the account is unlikely to withdraw for any other reason than buying a home. For the majority it is a great account.

Some people who recently became unemployed, may not know, even now, how long it'll be before they regain full time employment or how much they will be earning when they do.  Martin Lewis suggests have money set aside for 6 months worth of bills in case you become unemployed but COVID will cause some people to be unemployed for longer than that.  

epm-84

Deleted_User said:

masonic said:

Deleted_User said:

masonic said:

Deleted_User said:

masonic said:

I'm ambivalent towards the penalty. Rates on cash LISAs have typically been low, so people are have already penalised when using them as normal savings accounts, and S&S LISAs are not suitable to be used for short term savings. On the other hand, the small net ~6% penalty may serve a purpose as a deterrent from cashing in your LISA funds for frivolities.

We get 1K bonus a year with 4k in a year, can't really beat that!

As per the thread title, the penalty for withdrawals made before age 60 that don't go towards a first time property purchase is 20% rising to 25% at the end of the tax year. The 20% penalty wipes out the £1k bonus, while the 25% penalty results in you getting back less capital than you paid in.

Yes but anyone getting the account is unlikely to withdraw for any other reason than buying a home. For the majority it is a great account.

This thread is specific to withdrawals that do incur the penalty. While most people may intend to use the account for a house purchase, a significant number are using a S&S LISA for retirement. Anyone could be put into an adverse position where they have to consider making a withdrawal for other reasons. The reason for reducing the penalty to 20% from 25% was that Covid made that very situation more likely. So, as I first commented: "Rates on cash LISAs have typically been low, so people are have already penalised when using them as normal savings accounts" [i.e. not for retirement or house saving]

At no point have I suggested these are not good accounts in cases where they are used for the intended purposes.

Thrugelmir said:

If there was no penalty. Then providers would be less reluctant to offer the product. Administration costs money. People would be cashing in for all sorts of reasons. 

The penalty is paid to HM Treasury. I don't think the providers get a share of it. Perhaps you mean the penalty puts people off opening an account in the first place, but it seems like the lack of popularity of LISAs has been part of the reason why providers are reluctant to offer them.

A LISA is just a savings account, with penalty if you decide your money back. Sure it is a far harder penalty but still follows the normal foundation of a savings account. You put money in, you get interest, you want it back early, you lose the interest. (and in the case of an LISA a bit of your money).

With a fixed rate account if the withdrawal penalty is 90 days interest then once the account has been opened for 90 days you're still going to make a net gain even if you withdraw the entire balance on the 92nd day.  Realistically hardly anyone is going to open an account with a 90 day penalty and put in money which they need in the first 3 months.  While if you put £50,000 in and withdraw the entire balance after 120 days you'll get more interest than if you put £25,000 in.  So basically those whose short term plans change are most affected.

The Lifetime ISA doesn't have that time limit and it's the reverse, if you pay £20,000 in and withdraw the entire balance for the wrong reason you end up making a £1250 loss (minus interest) but if you put £4000 in and withdraw the entire balance for the wrong reason you make a £250 loss (minus interest), meaning those whose long term plans change are most affected.

It's much easier to predict what will happen in the short term than the long term, so I don't agree with your comparison.

veryintrigued

epm-84 said:

veryintrigued said:

Plenty of the fixed term accounts I hold have a penalty clause attached. I'm not aware these are about to be changed.

The current penalty is government imposed. If you have a fixed rate account with a loss of interest penalty for withdrawals that's because your bank/building society has imposed that term themselves, not because the government has told them to do it.

There was a change to Cash ISAs a few years back where the government allowed 'flexible ISAs' to be introduced.  It's up to the ISA provider whether or not they make their products flexible but the government made the option available.

All that is completely irrelevant.

It's akin to the people who seem to believe of 'the Governments money' having no relationship to the normal tax payer.

strawb_shortcake

But part of a LISA is the government's money, it is really unreasonable that they want something back if you cash in early and against the terms and conditions of the product? 
I'm sure it is really frustrating having a pot of money you can't touch in times of need, but equally they might be relieved come 60 that there was a penalty that put them off withdrawing early. 

epm-84

annabanana82 said:

But part of a LISA is the government's money, it is really unreasonable that they want something back if you cash in early and against the terms and conditions of the product? 
I'm sure it is really frustrating having a pot of money you can't touch in times of need, but equally they might be relieved come 60 that there was a penalty that put them off withdrawing early. 

Is it?

If the government change the Income Tax threshold from £12,500 to £16,500 then someone earning £16,500 will no longer pay tax instead of paying tax on £4000 of their earnings.  Would that then mean they are getting "the government's money"?

If not why is it any different if the government give taxpayers who want to put away money for a first home a tax refund of up to £1000 per year any different?  

For most people using a Lifetime ISA for a retirement isn't a good option as a workplace pension offers better tax relief options.

One other thing to bear in mind if many financial providers don't like the terms of Lifetime ISA so don't offer them.  The fact that Skipton Building Society are the biggest financial provider offering them, while the likes of Barclays, Natwest and Santander all offered Help2Buy ISAs says a lot.

strawb_shortcake

epm-84 said:

annabanana82 said:

But part of a LISA is the government's money, it is really unreasonable that they want something back if you cash in early and against the terms and conditions of the product? 
I'm sure it is really frustrating having a pot of money you can't touch in times of need, but equally they might be relieved come 60 that there was a penalty that put them off withdrawing early. 

Is it?

If the government change the Income Tax threshold from £12,500 to £16,500 then someone earning £16,500 will no longer pay tax instead of paying tax on £4000 of their earnings.  Would that then mean they are getting "the government's money"?

If not why is it any different if the government give taxpayers who want to put away money for a first home a tax refund of up to £1000 per year any different?  

For most people using a Lifetime ISA for a retirement isn't a good option as a workplace pension offers better tax relief options.

One other thing to bear in mind if many financial providers don't like the terms of Lifetime ISA so don't offer them.  The fact that Skipton Building Society are the biggest financial provider offering them, while the likes of Barclays, Natwest and Santander all offered Help2Buy ISAs says a lot.

Okay, its the government's incentive to encourage people to save and plan for two key points in someone's life. 
I don't see a LISA as being an alternative to a pension but in addition too. 
At the end of the day someone going in to a LISA should be doing it with their eyes fully open, choosing to lock money away for any period of time comes with risk this is no different.