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Implications of withdrawing from a Lifetime ISA
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w00519773
Posts: 206 Forumite
I opened a Lifetime ISA when I was 39 (in 2021). I bought my house in 2014 so I am using the ISA to save for my pension.
I spoke to Hargreaves Lansdowne today (the ISA provider) and I am confused about the implications of withdrawing from a LISA for invalid reasons i.e. before I am of pension age.
To explain, let's assume I am 39 now and I opened a Lifetime ISA today and contributed £4000 (the maximum). The government would contribute $1000 (25%), so the LISA would be worth £5000 (lets assume it is cash with no interest rather than stocks so the value does not change). Say in the next tax year I decided I needed to withdraw £1000 (to pay bills), then as I am not at pension age and not buying my first home, then I assumed my LISA would be worth £3,750 i.e.:
50001000((25/100)*1000)=3,750
However, the way HL explained it  my LISA would be worth £2,750 (because the tax deduction is calculated against the total amount of the LISA (£5,000) rather than the withdrawal i.e.:
50001000((25/100)*5000)=2,750
If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?
I spoke to Hargreaves Lansdowne today (the ISA provider) and I am confused about the implications of withdrawing from a LISA for invalid reasons i.e. before I am of pension age.
To explain, let's assume I am 39 now and I opened a Lifetime ISA today and contributed £4000 (the maximum). The government would contribute $1000 (25%), so the LISA would be worth £5000 (lets assume it is cash with no interest rather than stocks so the value does not change). Say in the next tax year I decided I needed to withdraw £1000 (to pay bills), then as I am not at pension age and not buying my first home, then I assumed my LISA would be worth £3,750 i.e.:
50001000((25/100)*1000)=3,750
However, the way HL explained it  my LISA would be worth £2,750 (because the tax deduction is calculated against the total amount of the LISA (£5,000) rather than the withdrawal i.e.:
50001000((25/100)*5000)=2,750
If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?
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Comments

Sounds like crossed wires  their explanation (or your understanding of it) is wrong and yours is right (other than the fact that it's a withdrawal penalty not a 'tax deduction')! The 25% penalty is applied to the amount withdrawn, not the residual balance:Any amount withdrawn from a Lifetime ISA that is not the result of a life event is subject to a 25% withdrawal charge. You should deduct this from the funds withdrawn by the investor.https://www.gov.uk/guidance/lifetimeisawithdrawalchargesandchargefreewithdrawals#whenyouneedtomakeawithdrawalchargew00519773 said:If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?0

eskbanker said:Sounds like crossed wires  their explanation (or your understanding of it) is wrong and yours is right (other than the fact that it's a withdrawal penalty not a 'tax deduction')! The 25% penalty is applied to the amount withdrawn, not the residual balance:Any amount withdrawn from a Lifetime ISA that is not the result of a life event is subject to a 25% withdrawal charge. You should deduct this from the funds withdrawn by the investor.https://www.gov.uk/guidance/lifetimeisawithdrawalchargesandchargefreewithdrawals#whenyouneedtomakeawithdrawalchargew00519773 said:If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?Thanks. So if I withdrew £1,000 i.e. £1,000 was transferred to my bank account, then my ISA would reduce by £1,333? i.e. it would effectively cost £333?That doesn't make sense to me because £333 is 33.3% of £1,000 and not 25%?0

w00519773 said:eskbanker said:Sounds like crossed wires  their explanation (or your understanding of it) is wrong and yours is right (other than the fact that it's a withdrawal penalty not a 'tax deduction')! The 25% penalty is applied to the amount withdrawn, not the residual balance:Any amount withdrawn from a Lifetime ISA that is not the result of a life event is subject to a 25% withdrawal charge. You should deduct this from the funds withdrawn by the investor.https://www.gov.uk/guidance/lifetimeisawithdrawalchargesandchargefreewithdrawals#whenyouneedtomakeawithdrawalchargew00519773 said:If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?Thanks. So if I withdrew £1,000 i.e. £1,000 was transferred to my bank account, then my ISA would reduce by £1,333? i.e. it would effectively cost £333?That doesn't make sense to me because £333 is 33.3% of £1,000 and not 25%?£333 is about 25% of £1,333, which is the amount you would be withdrawing (this is equivalent to £1,000 capital plus return of Government bonus of £250 + £83 net penalty).If you withdraw £1000, then you'd end up with £750 in your bank account and pay a £250 penalty. This would consist of £800 capital, £200 return of Government bonus and £50 net penalty.The penalty is calculated on the gross amount withdrawn from your balance.0

Thanks. So if I withdrew £1,000 i.e. £1,000 was transferred to my bank account, then my ISA would reduce by £1,333? i.e. it would effectively cost £333?That doesn't make sense to me because £333 is 33.3% of £1,000 and not 25%?0

masonic said:w00519773 said:eskbanker said:Sounds like crossed wires  their explanation (or your understanding of it) is wrong and yours is right (other than the fact that it's a withdrawal penalty not a 'tax deduction')! The 25% penalty is applied to the amount withdrawn, not the residual balance:Any amount withdrawn from a Lifetime ISA that is not the result of a life event is subject to a 25% withdrawal charge. You should deduct this from the funds withdrawn by the investor.https://www.gov.uk/guidance/lifetimeisawithdrawalchargesandchargefreewithdrawals#whenyouneedtomakeawithdrawalchargew00519773 said:If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?Thanks. So if I withdrew £1,000 i.e. £1,000 was transferred to my bank account, then my ISA would reduce by £1,333? i.e. it would effectively cost £333?That doesn't make sense to me because £333 is 33.3% of £1,000 and not 25%?£333 is about 25% of £1,333, which is the amount you would be withdrawing (this is equivalent to £1,000 capital plus return of Government bonus of £250 + £83 net penalty).If you withdraw £1000, then you'd end up with £750 in your bank account and pay a £250 penalty. This would consist of £800 capital, £200 return of Government bonus and £50 net penalty.The penalty is calculated on the gross amount withdrawn from your balance.0

w00519773 said:masonic said:w00519773 said:eskbanker said:Sounds like crossed wires  their explanation (or your understanding of it) is wrong and yours is right (other than the fact that it's a withdrawal penalty not a 'tax deduction')! The 25% penalty is applied to the amount withdrawn, not the residual balance:Any amount withdrawn from a Lifetime ISA that is not the result of a life event is subject to a 25% withdrawal charge. You should deduct this from the funds withdrawn by the investor.https://www.gov.uk/guidance/lifetimeisawithdrawalchargesandchargefreewithdrawals#whenyouneedtomakeawithdrawalchargew00519773 said:If I invested £4000 in a LISA today (and left it as cash with no interest) and withdrew £1000 in the next tax year e.g. in October 2024 then would my LISA be worth £3750, £2750 or some other amount after the withdrawal?Thanks. So if I withdrew £1,000 i.e. £1,000 was transferred to my bank account, then my ISA would reduce by £1,333? i.e. it would effectively cost £333?That doesn't make sense to me because £333 is 33.3% of £1,000 and not 25%?£333 is about 25% of £1,333, which is the amount you would be withdrawing (this is equivalent to £1,000 capital plus return of Government bonus of £250 + £83 net penalty).If you withdraw £1000, then you'd end up with £750 in your bank account and pay a £250 penalty. This would consist of £800 capital, £200 return of Government bonus and £50 net penalty.The penalty is calculated on the gross amount withdrawn from your balance.No. There is no universal '£83 net penalty'. It's just the arithmetic in that exampleIf you had to pay a £1,000 bill and withdrew £1,000 you'd only get £750 (after the 25% penalty) in your bank and be £250 short for your billIf you wanted to get £1,000 in your bank account to pay that bill you'd need to withdraw £1,333 to get £1,000 (after the 25% penalty)masonic was just breaking it down further to highlight how much you'd be down on the deal, that net penalty, the cost to you on the round trip if you like0

w00519773 said:Thanks. It was not aware of the £83 net penalty. Is this penalty imposed for every withdrawal and is it always £83 across providers?
Withdrawal penalties are imposed for every withdrawal before you reach 60, unless they're for a qualifying first time property purchase.1 
eskbanker said:w00519773 said:Thanks. It was not aware of the £83 net penalty. Is this penalty imposed for every withdrawal and is it always £83 across providers?
Withdrawal penalties are imposed for every withdrawal before you reach 60, unless they're for a qualifying first time property purchase.
1) £1000 +
2) 25% of £1000 +
3) 6.25% of £1000
Therefore it costs £62.50 more to withdraw £1000 than it costed to invest. Why is there a 6.25% penalty  is that accross all providers? Is it just a deterrent to withdraw?0 
w00519773 said:So if I make a withdrawal of £1,000 then my plan reduces by:
1) £1000 +
2) 25% of £1000 +
3) 6.25% of £1000Therefore it costs £62.50 more to withdraw £1000 than it costed to invest. Why is there a 6.25% penalty  is that accross all providers? Is it just a deterrent to withdraw?If you withdraw £1000, your plan reduces by £1000, then the 25% penalty is applied, and you receive £750. It only costed you £800 to invest £1000, because the Government topped up the £800 by 25%, adding on £200.Yes, these are Government rules and it was intentional that there should be a 6.25% net penalty to withdrawing for a reason other than a first time property purchase or retirement. During Covid, they reduced the penalty so that you got out what you put in (+ any interest), then raised it again afterwards.0
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