Permanently reduce the Lifetime ISA - withdrawal penalty?

epm-84

annabanana82 said:

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.

I'm not sure you understand workplace pensions.

If you opt in the minimum you can pay in is 5% of pensionable pay and the employer has to pay in at least 3% of pensionable pay on top of that.  If hypothetically you earned £50,000 a year and your employer only offered the minimum contribution required you could still choose to pay in £2000 per month to your workplace pension, you wouldn't get any extra off your employer but you would get tax relief on £24,000 per annum which is a lot more than you would get by paying the minimum into the workplace pension and then using the Lifetime ISA on top.  (The impact of not hitting the 40p threshold would be a further benefit that wouldn't exist if you paid your post-tax salary into a Lifetime ISA.)

The only people who should be using a Lifetime ISA for retirement are:
1. People who are not employees or who didn't qualify for a workplace pension at the time the Lifetime ISA was launched.
2. Those who want the flexibility to get some of their money before the age of 60.
3. Those who were saving for a first home but have had to give up on that aspiration for one reason or another.

Over the years there's mean many financial products aimed at first time buyers.  The Help2Buy ISA and building society first home accounts that pre-dated the Help2Buy ISA all allowed you to close the account and to get back all of your original investment plus any interest earned.  The Lifetime ISA is the first and only account that doesn't allow that and unfortunately it's now the only option as the other first home accounts have disappeared.

masonic

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.

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).

You shouldn't include the bonus as part of the interest rate when you are considering the scenario of accessing the money outside of the penalty free withdrawal conditions. The bonus is taken away by the 20% penalty (rising to 25% in April).

The same logic can be applied to a savings account with a penalty for early access. If you withdraw the money and pay a penalty, the rate you achieve is typically low.

The bonus is not a bonus rate, it is a lump sum paid once when money is deposited. Over a holding period of 20-40 years, the net result is very different than if you held over 3-4 years then used the proceeds to buy a house, and it can be negative if you withdraw early for other reasons. So it is only an attractive proposition if the account is used in specific ways.

grumiofoundation

epm-84 said:

annabanana82 said:

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.

I'm not sure you understand workplace pensions.

If you opt in the minimum you can pay in is 5% of pensionable pay and the employer has to pay in at least 3% of pensionable pay on top of that.  If hypothetically you earned £50,000 a year and your employer only offered the minimum contribution required you could still choose to pay in £2000 per month to your workplace pension, you wouldn't get any extra off your employer but you would get tax relief on £24,000 per annum which is a lot more than you would get by paying the minimum into the workplace pension and then using the Lifetime ISA on top.  (The impact of not hitting the 40p threshold would be a further benefit that wouldn't exist if you paid your post-tax salary into a Lifetime ISA.)

The only people who should be using a Lifetime ISA for retirement are:
1. People who are not employees or who didn't qualify for a workplace pension at the time the Lifetime ISA was launched. See below
2. Those who want the flexibility to get some of their money before the age of 60. If they want to access money then Stocks and Shares ISAs are better.
3. Those who were saving for a first home but have had to give up on that aspiration for one reason or another.

Over the years there's mean many financial products aimed at first time buyers.  The Help2Buy ISA and building society first home accounts that pre-dated the Help2Buy ISA all allowed you to close the account and to get back all of your original investment plus any interest earned.  The Lifetime ISA is the first and only account that doesn't allow that and unfortunately it's now the only option as the other first home accounts have disappeared.

I'm not sure you understand the benefits of lifetime ISAs vs pension.

Once you have maximised employer contributions then if you are a basic-rate non salary sacrifice) tax payer then the first £4000 of retirement savings are better served in a lifetime ISA. Lifetime ISA offers the same/better as paying extra into a pension in terms of tax-relief/bonus. 

If you will be a basic-rate tax payer in retirement the lifetime ISA (25% top-up) beats pension (25% top-up via tax-relief with 75% being taxed at 20% in retirement).
£800 into pension -> £1000. 25% tax-free plus 75% taxed @ 20% = £850
£800 into LISA -> £1000. No tax on withdrawal = £1000

If you will be a non-tax payer in retirement the 2 are the same but if someone can afford £4000 into pension this wont be the case if they want to access as lump sum. 

https://www.which.co.uk/money/pensions-and-retirement/personal-pensions/lifetime-isa-vs-pension-affl34p2r2uk