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Lifetime Isa penalty cut offers a crisis lifeline

The withdrawal penalty on lifetime individual savings accounts has been cut in an attempt to help struggling savers.

The withdrawal penalty on lifetime individual savings accounts (Lisas) has been cut in an attempt to help savers struggling amid the crisis. Lisas are designed to help people saving for a first home or their retirement. 

If you are over 18 and under 40 you can open a Lisa and deposit up to £4,000 a year. As with other Isas your money can grow tax-free but there is an added benefit: every year the government will top up your savings by 25%. So you could get an extra £1,000 a year.

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You can only use the money to put down a deposit for your first home or to help with retirement. So, if you try to access it before your 60th birthday for anything other than to buy your first home you usually pay a 25% withdrawal penalty.

The government has now announced that the penalty is being cut to 20% until April 2021. That may not sound like much, but it effectively means you are only giving back the government bonus if you access your cash early rather than some of your own savings too. 

“We know that some people are experiencing financial difficulties during these unprecedented times ,” says John Glen, the economic secretary to the Treasury.

However, that doesn’t mean Lisa holders should rush to access their cash. If the money is in a cash Lisa then it can be withdrawn easily enough. “But any money saved into an investment Lisa may be subject to the fluctuations of the stockmarket,” says Richard Pearson, director of investment platform EQI.

And that means people may well sell near the bottom, forfeiting the higher returns that being patient and allowing the portfolio to recover could bring. “Markets have been severely troubled... and therefore investors’ portfolio values could be diminished [at present]. Selling investments and withdrawing money now could crystallise losses and mean permanent reductions in the value of their savings.” 

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