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Lifetime ISA exit charge scrapped for first year

The government has scrapped the exit charge on the lifetime ISA for a year from its launch in April.

 
Lifetime ISA exit charge scrapped for first year

The government has scrapped the exit charge on the lifetime ISA for a year from its launch in April.

The lifetime ISA will provide investors with a 25% government bonus on savings up to £4,000. But those who withdraw the money for any reason other than buying a house or retiring forgot that bonus and will be hit with a 5% exit charge on top.

The penalty has proved controversial as it will lead to the government taking more money than they gave to savers hit by the exit charges.

That's because the 25% bonus is calculated only on the savers' contributions, and so represents just 20% of the combined contribution of both saver and bonus. But the 25% effective penalty, made up of the withdrawal of the bonus and the exit charge, applies across the whole pot.

Jane Ellison, financial secretary to the Treasury, told the House of Commons yesterday the government would scrap this charge in the product's first year due to the way the 25% bonus will be paid. 

As announced by the Treasury in September, the bonus will be paid on a monthly basis from the 2018/19 tax year to allow savers the benefits of compound growth on this bonus.

However, in the 2017/18 tax year, the bonus will be paid at the year end and not monthly.

‘This could create a difficult case where people face a 25% government charge up to 12 months before they receive the bonus,’ Ellison said. ‘We have listened to representations on this point, and so, to improve the product for consumers, I can confirm that there will be no government charges in 2017-18.

‘If people want to withdraw from their lifetime ISA in 2017-18, they must close their account, and there will be no government charge to do so. No bonuses will be paid on such closed accounts.’

Rachel Vahey, product technical manager at fund platform Nucleus, said the move was 'simple tidying up of administration, not an easing of policy' and called for the 5% exit charge to be permanently withdrawn.

'The lifetime ISA a is being positioned as an ISA, and as such should offer investors flexibility. We don't believe such a high withdrawal charge is warranted.

2 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Dec 14, 2016 at 16:57

More accurate to say that with the new Digital reporting a challenge for HMRC and the industry- the former did not want be in a position of not being able to manage any issues in the first year, were their to be a lot of withdrawals

This is a very complex product for the retail investor to understand and issues can be expected. Most Plan Managers are not looking to offer from 6th April due to the slowness of HMRC to publish the final rules

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RSJ

Dec 15, 2016 at 06:38

Please could anyone clarify if this lifetime ISA is one off or is the allowance of £4000, once every year? thanks

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