What is the Lifetime ISA withdrawal penalty and when does it apply?

Full answer

The Lifetime ISA (LISA) offers a generous 25% government bonus on contributions up to £4,000 a year, but this comes with a significant penalty for using the money outside its intended purposes, which catches out many savers who need access to their funds unexpectedly. **The three penalty-free withdrawal reasons** You can withdraw from a LISA without any charge in exactly three circumstances: buying your first home (the property must cost £450,000 or less, and you must be a first-time buyer using it with a mortgage), reaching age 60, or being diagnosed with a terminal illness with a life expectancy of less than 12 months. Any withdrawal outside these three situations triggers the 25% government withdrawal charge. **Why the 25% charge is more painful than it sounds** It is tempting to think the 25% charge simply claws back the 25% government bonus you received, leaving you back where you started -- but because the charge is calculated as 25% of the AMOUNT WITHDRAWN (which includes your own original contributions, not just the bonus), the effective penalty on your own money is actually higher than 25%. In practice, the charge can leave you with roughly 93.75% of your own original contribution back, meaning you lose money even setting aside the government bonus entirely. **Worked example** Someone contributes £4,000 to a LISA and receives the £1,000 government bonus (25%), giving a total pot of £5,000. If they later withdraw the full £5,000 for a reason other than a first home, age 60, or terminal illness, the 25% withdrawal charge applies to the full £5,000, i.e. £1,250 is deducted, leaving them with £3,750 -- meaning they have lost £250 of their OWN original £4,000 contribution, on top of losing the entire £1,000 bonus. **The house price cap trap** Even a penalty-free first-home withdrawal is restricted to properties costing £450,000 or less -- this cap has not risen with house prices in many parts of the UK, meaning some first-time buyers in expensive areas (particularly London and the South East) find their LISA becomes penalised if their purchase price exceeds the cap, even though they are using it for a genuine first home purchase. **When a LISA still makes sense despite the penalty risk** A LISA is generally most suitable for people confidently saving towards a first home under £450,000, or building a retirement pot they are confident they will not need before 60 -- for shorter-term or uncertain savings goals, a Cash ISA or other flexible savings account avoids the withdrawal charge risk entirely, even without the 25% bonus upside. **Practical tip** Before opening or contributing further to a LISA, be realistic about whether you might need the money earlier than planned -- the withdrawal charge means a LISA can be a worse home for emergency savings than a standard easy-access account, despite the attractive headline bonus rate.

Try the calculator

More answers

• What is the difference between a regular ISA and a Lifetime ISA?