How to avoid Lifetime ISA penalties and keep your savings intact

Lifetime ISAs (LISAs) are a fantastic tool for saving towards your first home or retirement, offering a 25 per cent Government bonus on contributions.  

However, withdrawing funds for anything other than these specific goals can result in hefty penalties from HM Revenue & Customs (HMRC). 

In fact, a recent Freedom of Information (FOI) request revealed that in the 2022-23 tax year, the top 25 unauthorised withdrawals saw an average penalty of £11,000. 

Over 15,000 savers were hit with penalties of £1,000 or more, and more than 6,000 individuals faced penalties exceeding £2,000. 

The overall value of LISA penalties in the 2023-24 tax year soared to over £75 million, marking a 40 per cent increase from the previous year.  

Clearly, these penalties are catching many savers off-guard. So, how can you avoid being one of them? 

Understanding LISA rules – what triggers penalties? 

The 25 per cent withdrawal penalty is designed to ensure that LISAs are used solely for their intended purposes: buying a first home (valued at £450,000 or less) or saving for retirement, accessible tax-free once you turn 60.  

Withdrawals for any other reason, except in cases of terminal illness, will trigger this penalty. 

What makes the penalty particularly painful is that it doesn’t just claw back the Government bonus, it also takes a portion of your own savings.  

The LISA property price cap 

If you are saving to buy your first home, one of the most important things to consider is the £450,000 property price cap.  

In areas where house prices have surged, particularly in the south of England, this threshold may not stretch far enough. 

For example, in London, many areas far exceed this limit. 

Barnet’s average house price is £592,597, Camden’s is £858,303, and Hackney sits at £563,111.  

Even outside London, property hotspots like Cambridge (£487,493), Oxford (£475,247), and Guildford (£516,489) also surpass the LISA limit. 

To avoid the penalty, you will need to either buy a home below this threshold or face a charge for exceeding it. 

Build a financial safety net 

Unexpected financial pressures are a common reason why savers dip into their LISAs prematurely, triggering penalties.  

To avoid this, it is a good idea to build an emergency fund that you can tap into without touching your LISA. 

Having a separate fund for emergencies will allow your LISA to stay intact for its intended purpose.  

This could be buying a home or planning for your retirement and stops the temptation to make costly early withdrawals. 

Plan your retirement savings strategically 

If your LISA is part of your retirement plan, you must make sure it fits within a wider savings strategy.  

Since LISA funds cannot be accessed penalty-free until you turn 60, you will need other retirement savings or pension options that offer more flexibility in the meantime. 

This approach will help you avoid dipping into your LISA early and incurring penalties, allowing you to maximise its value when you eventually need it. 

Keep an eye on your contributions 

LISA contributions are capped at £4,000 per year, with a maximum Government bonus of £1,000 annually.  

Staying on top of these limits will help you make the most of the scheme while ensuring that you are not overly reliant on it, which could lead to premature withdrawals and penalties. 

Stay informed about rule changes 

As with any financial product, stay up to date with changes to LISA rules and allowances. 

The property market is constantly changing, so staying informed can help you make the best decisions for your future. 

Managing a LISA effectively requires careful planning and awareness of the rules. 

If you are looking for expert advice on how to avoid penalties and make the most of your savings, our team is here to help. Contact us today. 

 

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