LISA withdrawal fee - how does it work?

Jorikk

Does anyone have experience of withdrawing money from a LISA and/or could confirm my understanding of how this works - if I needed to withdraw some money prior to the age of 60 (saving for retirement not house purchase).

My understanding from an MSE article is that you (may?) lose money if you withdraw money before age 60 due to the 25% penalty fee.

The government website gives an example of the withdrawal penalty as - deposit £800, receive £200 bonus, total pot £1000. Withdraw £1000, 25% penalty, receive £750 back. So confirming you get back less than you put in, but....

The second example presumably involves a partial withdrawal and the maths is similar - withdraw £160, 25% penalty, receive £120.

So as I understand it the penalty is only effectively reducing your original money IF you withdraw the full amount? And a partial withdrawal not necessarily so?

E.g.

Deposit £800, receive £200 bonus, total pot £1000.

Withdraw £800, 25% penalty, receive £600.

So now hold £600 withdrawn + £200 still in LISA = £800 as started with.

Implying that as long as you don't withdraw more than 80% of the LISA balance and accept that some money is "stuck" in there, you will not lose money through the penalty overall on the original deposit amount.

Is this correct or am I missing anything?

Thanks if anyone can help. 

eskbanker

You're basically right - the penalty of 25% of the value of any premature withdrawal will only result in a loss against the original contribution if the majority of it is withdrawn early enough.  However, it's important to recognise that it's a long term product and should involve plenty of investment growth over the years, so calibrating anything back to the original value of contributions is largely meaningless....

Tobias2oo

A bit late to this thread, but what is an early withdrawal? My son and his partner have had the LISA for 2 years to save towards their first home. They don't earn enough to get a mortgage so both sets of parents are helping them to buy and their LISA funds are needed to go towards the purchase price.
1. The rules say that they are going to suffer the penalty because they can't get a mortgage;
2. The withdrawal calculation means they will lose £800 and £1200 respectively more than each of them put into their LISA's.

So are you saying that withdrawing after 2 years to buy their first home is too soon to receive their whole amount of deposited funds back?

Also, it does seem wrong that the government penalise young people who can't meet bank mortgage criteria and get help to buy from elsewhere. Then take a slice of their hard earned savings over and above the government's bonus amount, when they want to use the funds for the original intended purpose, i.e. buy their first home. Seems very harsh.

eskbanker

Tobias2oo said:

A bit late to this thread, but what is an early withdrawal?

It depends on context - in one sense it could mean access prior to 60, as that's the age after which no withdrawal penalties apply, but in the previous post I was making the point that after a certain period of time the value of the LISA will have grown by enough to offset the effect of the withdrawal penalty relative to original contributions.

Tobias2oo said:

My son and his partner have had the LISA for 2 years to save towards their first home. They don't earn enough to get a mortgage so both sets of parents are helping them to buy and their LISA funds are needed to go towards the purchase price.
1. The rules say that they are going to suffer the penalty because they can't get a mortgage;
2. The withdrawal calculation means they will lose £800 and £1200 respectively more than each of them put into their LISA's.

So are you saying that withdrawing after 2 years to buy their first home is too soon to receive their whole amount of deposited funds back?

Any LISA that's been open for two years (across three tax years) could have a maximum of £12K paid in, augmented to £15K with bonuses, so even if there was no interest paid, the 25% withdrawal penalty couldn't reduce the amount withdrawn below £11.25K, i.e. a maximum loss of £750 below what was paid in.  In reality there will have been interest added, so that loss would be smaller, so your calculation can't be right.

The net effect of the 25% withdrawal penalty, without any interest or investment growth, is to return a maximum of 6.25% below original contributions, so the interest or growth needs to exceed 6.67% to cancel that out - the period over which that'll happen will obviously depend on the interest/growth rates, but at current levels it ought to be possible to break even over 2/3 years if using leading products.

Tobias2oo said:

Also, it does seem wrong that the government penalise young people who can't meet bank mortgage criteria and get help to buy from elsewhere. Then take a slice of their hard earned savings over and above the government's bonus amount, when they want to use the funds for the original intended purpose, i.e. buy their first home. Seems very harsh.

For what it's worth, Martin Lewis agrees, but the government doesn't....

https://www.moneysavingexpert.com/news/2023/11/lifetime-isa-fix-martin-lewis-chancellor-first-time-buyers-fined/