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Lifetime ISA savers to face 6.25% withdrawal penalty charge – it could cost you hundreds

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April 5, 2021 marks the 2020/2021 tax year end, with 2021/22 tax year beginning on the following day. From pension contributions to ISA savings, many may well be looking to use up their annual allowances in advance of the tax year end.

It was eased to 20 percent last year, but on April 6, this is set to revert to 25 percent.

Currently, the 20 percent charge recovers the Government bonus, but when the easement ends, it could be savers lose some of the money they deposited in the account should they make “unauthorised” withdrawals.

The increase means the 25 percent charge effectively acts as a 6.25 percent penalty on non-permitted LISA withdrawals, AJ Bell has warned.

There are permitted instances when money can be withdrawn from the account without the penalty charge.

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Savers will still be able to access their LISA pot tax-free from the age of 60, where the funds are used towards a deposit on their first home (if the property is valued at £450,000 or less), or if they become terminally ill.

However, anyone else who is planning to access their LISA pot in other circumstances faces a race against time to avoid the higher early withdrawal charge, the investment platform warned.

Tom Selby, senior analyst at AJ Bell, commented: “Given the Government’s initial decision to reduce the LISA early withdrawal charge from 25 percent to 20 percent was meant to help struggling savers facing income uncertainty as a result of the pandemic, it would have made sense to extend the reduction into 2021/22 at the very least.

“With the furlough scheme set to be phased out, this is exactly the point millions of people will likely face the greatest uncertainty over their future employment.

“But Chancellor Rishi Sunak chose not to go down this route, meaning anyone planning to access their LISA early faces a race against time to dodge the exit charge hike.”

So, how does a 25 percent early withdrawal charge equate to a 6.25 percent penalty?

Mr Selby explained: “The impact on your pocket from the early withdrawal charge increase is significant.

“Take someone who has paid £4,000 into their LISA and had this topped up to £5,000 via the Government bonus.

“They then decide to access their entire pot early because they’re worried about their income.

“If they do this before April 6, 2021, they will be charged 20 percent of the withdrawal, meaning they will simply repay the £1,000 Government bonus they have received.

“However, if they do this from April 6, 2021, they will be charged 25 percent of the withdrawal, returning the £1,000 Government bonus and paying a £250 penalty as well.

“This extra £250 penalty is 6.25 percent of the £4,000 the investor originally paid into their LISA.”



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