Lifetime ISA withdrawal

w00519773

I have a lifetime ISA.

I wanted to understand the implications of withdrawing from a lifetime ISA (for an invalid reason i.e. not for pension and for first time house buy - mortgage overpayment in my case  as I did not understand how you "could lose more than you put in", so I called the provider. Here is the scenario I used scenario:

1) I open a lifetime ISA on 01/04/24 in the 2024 tax year and deposit £4000.
2) A 25% bonus is applied to the £4000 meaning the account is worth £5,250.
3) Close the account (make a withdrawal of £4,000) for a reason other than a first time house purchase or pension in the 2025 tax year.

The way  they explained it is that £4,000 would appear as cash in my bank account and I would lose the £250 bonus.  I would then be eligible to add £8000 in the 2025 tax year as it is a flexible ISA.  I asked if they were sure and they said yes.

I have since done my own research (see this post, which was part of the research: Implications of withdrawing from a Lifetime ISA — MoneySavingExpert Forum) and I discover that in the scenario above - if I attempted to close the account (withdrawing £4000) then I would actually only receive £3,750 and not £4000 meaning I would lose £250 of the equity I contributed as the 25% penalty is calculated on the interest as well. Therefore in my mind - you always lose more than you put in when making a withdrawal. Also the ISA is not flexible so I cannot contribute £8000 this tax year if I make a withdrawal of the full amount.

I made a complaint about this and the complaint officer called me on Thursday and upheld my complaint after listening to the call.  I was offered £200 in compensation and said I would think about it.  Does £200 sound reasonable? I think so but I wanted to see if anyone else has had a similar experience.  She suggested another call on Monday and I agreed.  I then realised that Monday was a bank holiday so I sent a secure message to confirm that I would receive a call.  To rub salt in the wound; the reply was: no.  I have to call them on Tuesday to arrange another call.

wjr4

Why would you need more compensation? You haven’t lost anything?

eskbanker

w00519773 said:

if I attempted to close the account (withdrawing £4000) then I would actually only receive £3,750 and not £4000 meaning I would lose £250 of the equity I contributed as the 25% penalty is calculated on the interest as well. Therefore in my mind - you always lose more than you put in when making a withdrawal.

No, not true - if there's interest/growth of more than about 6.7% between contribution and withdrawal then you get back more than you put in.

w00519773 said:

She suggested another call on Monday and I agreed.  I then realised that Monday was a bank holiday so I sent a secure message to confirm that I would receive a call.  To rub salt in the wound; the reply was: no.  I have to call them on Tuesday to arrange another call.

Not sure that really qualifies as a wound!

It does sound like the phone agent gave erroneous information about maths and flexibility, so if they're offering a couple of hundred quid for that then I'd consider that more than reasonable, especially if your repeated references to 'scenario' mean that it was all hypothetical and you didn't actually proceed?

masonic

w00519773 said:

Here is the scenario I used:

1) I open a lifetime ISA on 01/04/24 in the 2024 tax year and deposit £4000.
2) A 25% bonus is applied to the £4000 meaning the account is worth £5,250.
3) Close the account (make a withdrawal of £4,000) for a reason other than a first time house purchase or pension in the 2025 tax year.

This scenario is wrong. 25% of £4000 is £1000, so the account would be worth £5,000 after step 2, not £5,250

Closing the account does not involve making a withdrawal of £4,000, it involves making a withdrawal of £5,000 + closing interest, because that would be the balance of the account at closure. The 25% penalty would then be deducted from the amount withdrawn and you would receive the remainder.

w00519773 said:

The way  they explained it is that £4,000 would appear as cash in my bank account and I would lose the £250 bonus.  I would then be eligible to add £8000 in the 2025 tax year as it is a flexible ISA.  I asked if they were sure and they said yes.

They are also wrong if they said that. The bonus is not £250, it's £1,000. As you suspect, Lifetime ISAs cannot be flexible, and the bit about being able to add more than £4,000 in the 2025 tax year is also rubbish, so you definitely have grounds for complaint about all of that.

w00519773 said:

I made a complaint about this and the complaint officer called me on Thursday and upheld my complaint after listening to the call.  I was offered £200 in compensation and said I would think about it.  Does £200 sound reasonable? I think so but I wanted to see if anyone else has had a similar experience.  She suggested another call on Monday and I agreed.  I then realised that Monday was a bank holiday so I sent a secure message to confirm that I would receive a call.  To rub salt in the wound; the reply was: no.  I have to call them on Tuesday to arrange another call.

If they've offered you £200 for misinforming you, without you incurring any loss as a result, then I'd bite their arm off, it's incredibly generous.

w00519773

The only loss incurred is the mortgage interest payments that I would have saved had I made an overpayment as planned.  I wasn't expecting any compensation; just wanted to make them aware that this has happened.  The compensation offer was made so I wanted to see if it is fair as the person I spoke to seemed to speak in a way were a counter offer was expected (in my personal opinion).

eskbanker

Which institution is this by the way?  They seem remarkably generous towards someone who'd have ticked a box confirming reading and/or acceptance of product Ts & Cs when applying, so I might be tempted to phone them myself....

wjr4

w00519773 said:

The only loss incurred is the mortgage interest payments that I would have saved had I made an overpayment as planned.  I wasn't expecting any compensation; just wanted to make them aware that this has happened.  The compensation offer was made so I wanted to see if it is fair as the person I spoke to seemed to speak in a way were a counter offer was expected (in my personal opinion).

That’s your own problem though for not doing your own research, not theirs.