Get interest paid into or out of LISA?

ForumUser7

Hi, is there any benefit to having the interest paid into vs out of the LISA please? I know interest earned on interest credited won’t be taxed, but there is no additional government bonus etc. so thinking it may be worth having it paid out for access reasons. I don’t currently pay tax. Thank you

eskbanker

I was under the impression that interest is always kept within LISAs, given the imposition of withdrawal penalties, have you found any that pay it out?

masonic

Out of LISA, into nominated current account

I came here to say the same as eskbanker. Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

ForumUser7

eskbanker said:

I was under the impression that interest is always kept within LISAs, given the imposition of withdrawal penalties, have you found any that pay it out?

masonic said:

I came here to say the same as eskbanker. Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

Hi @eskbanker and @masonic

Thanks for your messages.

It is Bath Building Society

‘We calculate the interest daily and pay it annually on 31stDecember. Interest can be added to your account or paid to your nominated account.’

https://www.bathbuildingsociety.co.uk/personal-savings/accounts/tax-free-accounts/lifetime-isa/

masonic

Out of LISA, into nominated current account

ForumUser7 said:

It is Bath Building Society

‘We calculate the interest daily and pay it annually on 31stDecember. Interest can be added to your account or paid to your nominated account.’

https://www.bathbuildingsociety.co.uk/personal-savings/accounts/tax-free-accounts/lifetime-isa/

Very interesting. Given the rather poor interest rate (compared to other savings vehicles), there would be no reason not to take them up on their pay-away arrangement.

Bridlington1

Out of LISA, into nominated current account

masonic said:

Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

I may be wrong but I would've thought that in this case the interest wouldn't be subject to the penalty.

My understanding is that you have to pay the 25% penalty if you withdraw money from the LISA (unless it is used for a property purchase, retirement or you are terminally ill), but in this case the OP wouldn't be withdrawing money from the LISA, the OP would be receiving an interest payment that Bath BS is paying to an external account and therefore wouldn't be classed as an ``unauthorised" withdrawal.

masonic

Out of LISA, into nominated current account

Bridlington1 said:

masonic said:

Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

I may be wrong but I would've thought that in this case the interest wouldn't be subject to the penalty.

My understanding is that you have to pay the 25% penalty if you withdraw money from the LISA (unless it is used for a property purchase, retirement or you are terminally ill), but in this case the OP wouldn't be withdrawing money from the LISA, the OP would be receiving an interest payment that Bath BS is paying to an external account and therefore wouldn't be classed as an ``unauthorised" withdrawal.

This type of product was unknown to me. As far as I'm aware all other LISAs do not come with such an option, so withdrawing the interest would result in the penalty being charged.

Now that the product has been identified, I can see and verify it has a pay-away option, which wasn't explicitly mentioned in the OP. I don't know if this is a new product launch or just formerly postcode restricted. It is not yet listed in the usual places, so is quite obscure for the time being. It will be interesting to see if the loophole to access this product will be shared in the weekly tips email or elsewhere.

Bridlington1

Out of LISA, into nominated current account

masonic said:

Bridlington1 said:

masonic said:

Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

I may be wrong but I would've thought that in this case the interest wouldn't be subject to the penalty.

My understanding is that you have to pay the 25% penalty if you withdraw money from the LISA (unless it is used for a property purchase, retirement or you are terminally ill), but in this case the OP wouldn't be withdrawing money from the LISA, the OP would be receiving an interest payment that Bath BS is paying to an external account and therefore wouldn't be classed as an ``unauthorised" withdrawal.

This type of product was unknown to me. As far as I'm aware all other LISAs do not come with such an option, so withdrawing the interest would result in the penalty being charged.

Now that the product has been identified, I've been able to verify it has a pay-away option, which wasn't explicitly mentioned in the OP. I don't know if this is a new product launch or just formerly postcode restricted. It is not yet listed in the usual places, so is quite obscure for the time being.

I was more thinking along the lines of the interest is being paid away by Bath BS so wouldn't be classed as part of the LISA balance and therefore the interest being paid to another account wouldn't be classed as a withdrawal from the LISA, but simply a payment of interest which is credited outside of the LISA and thus exempt from the 25% penalty, in a similar way to interest being paid away not counting as a withdrawal when dealing with other types of savings accounts, such as regular savers, limited access EA accounts etc.

This is the first LISA I've come across that lets you have the interest paid away though so can't say for certain how having the interest earned in a LISA paid away works in practice.

The Bath LISA has been around for a while however and is currently listed on moneyfacts (if you search for existing customer accounts in the LISA section). It is currently still restricted to those who live, work or study in Bath or are existing members with 12 months continuous membership but this restriction hasn't always been in place, such as when the account was first launched IIRC.

masonic

Out of LISA, into nominated current account

Bridlington1 said:

masonic said:

Bridlington1 said:

masonic said:

Having it paid out would surely result in paying a 25% penalty, so worse than tax unless you pay it at the higher rate.

I may be wrong but I would've thought that in this case the interest wouldn't be subject to the penalty.

My understanding is that you have to pay the 25% penalty if you withdraw money from the LISA (unless it is used for a property purchase, retirement or you are terminally ill), but in this case the OP wouldn't be withdrawing money from the LISA, the OP would be receiving an interest payment that Bath BS is paying to an external account and therefore wouldn't be classed as an ``unauthorised" withdrawal.

This type of product was unknown to me. As far as I'm aware all other LISAs do not come with such an option, so withdrawing the interest would result in the penalty being charged.

Now that the product has been identified, I've been able to verify it has a pay-away option, which wasn't explicitly mentioned in the OP. I don't know if this is a new product launch or just formerly postcode restricted. It is not yet listed in the usual places, so is quite obscure for the time being.

I was more thinking along the lines of the interest is being paid away by Bath BS so wouldn't be classed as part of the LISA balance and therefore the interest being paid to another account wouldn't be classed as a withdrawal from the LISA, but simply a payment of interest which is credited outside of the LISA and thus exempt from the 25% penalty, in a similar way to interest being paid away not counting as a withdrawal when dealing with other types of savings accounts, such as regular savers, limited access EA accounts etc.

This is the first LISA I've come across that lets you have the interest paid away though so can't say for certain how having the interest earned in a LISA paid away works in practice.

I think what is clear is that Bath BS believes it is entitled to pay-away the income without it constituting a withdrawal under the regulations, so in practice this is what will happen. It will be no fault of the saver if they take Bath up on this and it turns out to be incorrect, so they probably wouldn't be penalised. Having just brushed up on the 2017 legislation, I'm inclined to agree that the letter of the law does not prohibit this. However, if I'm not missing anything, it does have some interesting implications, where for example creative use of a S&S LISA could permit an investment company to convert capital to income and leak it out through the cracks in the withdrawal restrictions to an investor who needs their money and does not wish to pay the penalty.

Bridlington1 said:
The Bath LISA has been around for a while however and is currently listed on moneyfacts (if you search for existing customer accounts in the LISA section). It is currently still restricted to those who live, work or study in Bath or are existing members with 12 months continuous membership but this restriction hasn't always been in place, such as when the account was first launched IIRC.

Ah yes, I see it now. I think it was you who raised elsewhere that anyone can become a member of Bath BS at the moment. But if they are requiring 12 months continuous membership for this account then it is still out of reach for most.