LISA 25% penalty charge

Chapel_man

My Granddaughter has a stocks and shares LISA, which (at present) is doing very well. 
If she cashes it out, rather than using it towards buying a house, does the 25% penalty apply to the total value of the fund, or just the amount that she paid into the fund?
If the penalty is on the total value of the fund, it seems unfair for the government to benefit from her investment choices.

leosayer

If your granddaughter withdraws the full amount then the 25% penalty applies. 

Martin Lewis has campaigned on this subject - see here:https://www.moneysavingexpert.com/news/2025/11/martin-lewis-lifetime-isa-budget/

It's worth remembering that she can withdraw penalty-free when she is 60 years old.

HappyHarry

It is 25% of the amount withdrawn.

Even with no growth at all, the withdrawal penalty is higher than the contribution bonus.

As an example:

£800 paid in, contribution bonus of 25% = £200, total value £1,000.

£1,000 withdrawn, penalty of 25%= £250, net withdrawal = £750.

Just to note, had your granddaughter made poor investment choices and lost money, many people would see it as even more unfair if the the penalty still applied based on the original contribution amount.

Your granddaughter would have (should have) been aware of the rules around withdrawing at the time the LISA was opened.

Alexland

Chapel_man said:

If the penalty is on the total value of the fund, it seems unfair for the government to benefit from her investment choices.

The government has paid interest on the national debt to the gilt holders for the borrowing to support the LISA bonus so it's not unreasonable that they get the growth on the bonus if it turns out the bonus was not earned by using it towards either a qualifying property bonus or to support age 60+

The 6.25% early access is more debatable in particular because the government have failed to increase the property price limit to reflect house inflation.

Albermarle

Chapel_man said:

My Granddaughter has a stocks and shares LISA, which (at present) is doing very well. 
If she cashes it out, rather than using it towards buying a house, does the 25% penalty apply to the total value of the fund, or just the amount that she paid into the fund?
If the penalty is on the total value of the fund, it seems unfair for the government to benefit from her investment choices.

A LISA 's function is to help with a first home and/or as a source of retirement income.
If you just want to invest and spend the money on something else, a S&S ISA would have been more suitable.

eskbanker

Alexland said:
The 6.25% early access is more debatable in particular because the government have failed to increase the property price limit to reflect house inflation.

Just to add for anyone who didn't spot it, the government has committed in the budget to revisiting support for first-time buyers, with the intention of replacing LISA (for FTBs) with another product that'll allegedly be simpler, effectively in lieu of taking any notice of the LISA reform recommendations from the treasury select committee earlier this year:

4.230 Lifetime ISA Reform – The government will publish a consultation in early 2026 on the implementation of a new, simpler ISA product to support first time buyers to buy a home. Once available, this new product will be offered in place of the Lifetime ISA.

saajan_12

Chapel_man said:

My Granddaughter has a stocks and shares LISA, which (at present) is doing very well. 
If she cashes it out, rather than using it towards buying a house, does the 25% penalty apply to the total value of the fund, or just the amount that she paid into the fund?
If the penalty is on the total value of the fund, it seems unfair for the government to benefit from her investment choices.

Yes its on the total value withdrawn, but no I don't think that's unfair.
Say a maxed out 1yr LISA fund gains by 10%, then granddaughter profits on whole £5000, ie £500 gain, but that's effectively £400 gain on her investment plus £100 gain on the government bonus. If she doesn't use the LISA for the intended purpose and gives back the £1000 government bonus, she should also give back the £100 gain on it. Another way to think about it is if the government invested the £1000, they would have gotten the £100 gain without involving granddaughter. So they should get that back. 

What I do think is unfair is instead of taking back the bonus (20% penalty) they take back more (25% penalty). 

Alexland

eskbanker said:

Just to add for anyone who didn't spot it, the government has committed in the budget to revisiting support for first-time buyers, with the intention of replacing LISA (for FTBs) with another product that'll allegedly be simpler, effectively in lieu of taking any notice of the LISA reform recommendations from the treasury select committee earlier this year:

Yes looks like they are re-inventing the HTB ISA where the bonus is paid during conveyancing to avoid withdrawal penalties (and sadly interest or investment growth on bonuses). Also looks like they are settling on pensions being the way to save for retirement now they are less attractive due to budget changes.

Hopefully they will let existing LISA holders make contributions for a bit longer but there is a whole backend API to maintain for bonus claims so it's unlikely to be possible to claim bonuses until age 50 for the younger holders.

They will have to think of the transitional arrangements for home savers who started with a LISA and would move to the new HTB ISA as it wouldn't be fair to make them pay a penalty but they couldn't allow a transfer window (as they did last time) as then it would be double bonused. Maybe they will allow home buyers to use both products on the same purchase? But they might want to stop people contributing to both in the same tax year.

It might be easier to simply declare that LISAs become normal Cash or S&S ISAs when it is no longer possible to contribute which would be my strong preference to save duplicated account fees. However then there would be the problem of people making contributions in the final tax year knowing they would have access the year after. Depends how strongly they feel the need to penalise early access before 60 or the money being used towards expensive properties.

eskbanker

Alexland said:

eskbanker said:

Just to add for anyone who didn't spot it, the government has committed in the budget to revisiting support for first-time buyers, with the intention of replacing LISA (for FTBs) with another product that'll allegedly be simpler, effectively in lieu of taking any notice of the LISA reform recommendations from the treasury select committee earlier this year:

Yes looks like they are re-inventing the HTB ISA where the bonus is paid during conveyancing to avoid withdrawal penalties (and sadly interest or investment growth on bonuses). Also looks like they are settling on pensions being the way to save for retirement now they are less attractive due to budget changes.
I haven't seen anything suggesting any change to LISAs for those using them for retirement - the budget announcement was specifically about a new product for FTBs?

Hopefully they will let existing LISA holders make contributions for a bit longer but there is a whole backend API to maintain for bonus claims so it's unlikely to be possible to claim bonuses until age 50 for some of the younger holders.
I don't really follow this point, surely bonuses will continue to be added for as long as the LISA exists, or are you speculating about rules of the new product?

They will have to think of the transitional arrangements for home savers who started with a LISA and would move to the new HTB ISA as it wouldn't be fair to make them pay a penalty but they couldn't allow a transfer window as then it would be double bonused. Maybe they will allow home buyers to use both products on the same purchase.
If the new product is based on bonus award at purchase, as per HTB, then it would perhaps be equitable to allow transfer into it from LISA at 80% of its value, i.e. reversing out the bonus but retaining investment growth or accrued interest?

Maybe it would be easier to convert LISAs into normal Cash or S&S ISAs when it is no longer possible to contribute which would be my strong preference.
Personally I'd have thought it unlikely that they'd effectively waive all penalties for premature access?

Comments inline above....

Alexland

eskbanker said:

Comments inline above....

In the full budget report they say "Once available, this new product will be offered in place of the Lifetime ISA" so my reading of 'in place' is that the new HTB ISA product will not be available alongside so the old LISA product will be ended somehow at least for earning bonuses maybe also new contributions.

I doubt the government would want to continue incurring the ongoing cost of the admin, IT, reporting, etc for supporting ongoing LISA bonus claims for just people using it for age 60+ access if their intent is to launch a new replacement product for home buying which is probably why most people were using it.

For a basic rate tax payer that will no longer have a sal-sac pension then keeping LISAs for retirement could be seen as a better loophole for making additional retirement contributions which they might want to close.

I agree allowing a transfer window from LISAs at 80% of the account valuation might work assuming the new product provides a similar bonus on completion. Or maybe once there is no longer the risk people are making contributions expecting short term access they could just unlock the accounts into normal ISAs for immediate access anyway. Might be a popular move and wouldn't cost them anything more.

eskbanker

Alexland said:
In the full budget report they say "Once available, this new product will be offered in place of the Lifetime ISA" so my reading of 'in place' is that the new HTB ISA product will not be available alongside so the old LISA product will be ended somehow at least for earning bonuses maybe also new contributions.

To me, that sentence needs to be read in the context of the one before it, i.e. "...the implementation of a new, simpler ISA product to support first time buyers to buy a home", rather than actually signifying any desire to terminate LISAs altogether, but time will tell!

Alexland said:

For a basic rate tax payer that will no longer have a sal-sac pension then keeping LISAs for retirement could be seen as a better loophole for making additional retirement contributions which they might want to close.

I'm only aware of a planned capping of NI relief for sal-sac pensions, so don't see how a LISA (with no NI relief at all) would support people any better than continuing with the sal-sac?