Lifetime ISAs are designed to help people buy their first home or retire. If you take money out of your account for any other reason*, you might have to pay the government’s early withdrawal fee.
*There’s an exception to this. If you’re terminally ill or you’ve passed away, you or your relatives won’t be charged the early withdrawal fee.
So, how much is the government withdrawal charge?
The government’s early withdrawal charge is 25% of what you take out. That 25% charge means, you’ll have to give back all of the bonus you've received, plus a bit of your own money (the amount of your own money you have to hand over on top of the bonus equates to 6.25% – that's £6.25 for every £100 you're withdrawing).
For example... 🔍
You put £1,000 into your Lifetime ISA. 👏
The government gave you 25% of that (£250), so you now have £1,250 in your account. 🎉
But you want to take out the full balance of £1,250 before buying a home, for something else, like an expensive hen do for your friend that's getting seriously expensive. ✈️
So, you have to pay the government's 25% early withdrawal fee (25% of £1,250 = £312.50). 👎
The amount left that you can withdraw = £937.50. 👛
You don’t want to pay that!
And we don’t want you to pay that either. Also a quick reminder – all Lifetime ISA providers are bound to obey the rules set by the government, and that's who the withdrawal charge goes directly to (we don't see a penny of it).
So, here are some ways you can make sure you don’t ever have to pay the 25% fee...
#1: Open your Lifetime ISA at least 12 months before you plan on buying your home.
You can’t use a LISA to buy a home unless your account has been open for 12 whole months or more.
If you plan on buying a home before that 12 month mark and want to use the money in your account for your deposit, you’ll have to pay the early withdrawal fee.
#2: Prepare for emergencies
Things can be difficult when an emergency comes up and all of your savings are in a Lifetime ISA. Instead, people often put an emergency fund in an account that they can easily access, without paying any withdrawal fees.
Tip: Usually, an emergency fund is at least 3 months of your salary.
#3: Think yearly, not monthly
With a Lifetime ISA, there are no rules on how much you can put in each month. Instead, you’re given a yearly maximum of £4,000. This can be useful if you’re unsure about your money situation rn.
Here’s an example of why this matters...
Harper hasn’t saved an emergency fund. So, she drops her monthly LISA contribution from £333, to £100. This way, she has an extra £233 to keep at hand in case she needs it. 💸
2 months later, her MOT costs more than she thought it would. Thankfully, she doesn’t have to dip into her Lifetime ISA and pay any early withdrawal fees. 🚗
Later that year, Harper gets a big bonus from work and has been actively saving money for an emergency fund. She’s in a better place financially than she was before. 🙌
So, before the tax year ends, Harper puts £2,800 into her Lifetime ISA in one big chunk. 💰
You could do the same with our one-off contribution feature. 📱
#4: Ask your solicitor to withdraw your money
When you’re ready to buy, your solicitor or conveyancer will contact your LISA provider to transfer your funds. This is the process because it proves to the government that you’re actually using your LISA to buy a home.
If your offer’s accepted on a home and you withdraw the money from your LISA yourself, you’ll pay the 25% early withdrawal fee (even though it’s technically not early).
#5: Remind yourself of the LISA rules
Remember that you can only use your LISA to buy a home under these conditions:
- This has to be your first home (i.e. you don’t already own a home or have part-ownership on another property).
- The property you’re planning to buy has to be in the UK and worth no more than £450,000.
- You need to be using a mortgage to buy the property (i.e. you can’t pay for it in full upfront).
- You have to live in the property once you buy it (i.e. you can’t use a LISA to buy a property you want to rent out).
- It doesn't matter if you're buying with someone else who is not a first-time buyer, you can still use a Lifetime ISA for your half of the purchase.
P.s. Screenshot this to remind yourself later.
#6: Keep it for retirement
If something happens and you can’t use your Lifetime ISA to buy your first home, there is another option that doesn’t involve any withdrawal fees.
Instead, you can keep your money in your Lifetime ISA to use for retirement. When you turn 60, you can take it out fee-free!