Can I withdraw from a Lifetime ISA without paying the 25% penalty?

Full answer

A Lifetime ISA (LISA) is designed for two specific long-term goals: buying your first home or saving for retirement. The government adds a 25% bonus on contributions up to GBP 4,000 per tax year -- a maximum bonus of GBP 1,000 per year. However, withdrawals outside qualifying circumstances trigger a penalty. Qualifying withdrawals -- no penalty: 1. First home purchase: You can use your LISA to buy your first residential property, provided the purchase price is GBP 450,000 or less. The property must be purchased with a mortgage (cash purchases do not qualify), and the LISA must have been open for at least 12 months. 2. Age 60 or over: Once you turn 60, you can withdraw the full fund -- your contributions, the government bonus, and all growth -- completely free of penalty and tax. 3. Terminal illness: If you are diagnosed with a terminal illness and have a life expectancy of less than 12 months, you can withdraw penalty-free. Non-qualifying withdrawals -- the 25% penalty: If you withdraw for any other reason (for example, general savings, a second home, or an emergency fund), HMRC applies a 25% withdrawal charge on the amount taken out. The effect of the 25% charge is that it claws back the entire government bonus AND takes 6.25% of your own money -- not just the bonus. Example: you contribute GBP 4,000. HMRC adds GBP 1,000 bonus. Total pot: GBP 5,000. A non-qualifying withdrawal triggers a 25% charge of GBP 1,250. You receive GBP 3,750 -- losing GBP 250 of your own money as well as the full GBP 1,000 bonus. The LISA annual contribution limit is GBP 4,000 and it counts toward your overall GBP 20,000 ISA allowance. You must be aged 18-39 to open a LISA and can contribute until age 50.

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