Government Response

The Government responded to this petition on Thursday 4th March 2021

The 25% withdrawal charge protects the Lifetime ISA’s (LISA) status as a long-term savings product. The Government has no plans to permanently reduce this charge to 20%.

The LISA is designed to be a long-term savings product to support younger people to save for their first home or later life. It provides a generous government bonus of 25% on up to £4,000 of contributions each year. These funds, including any government bonus, can be withdrawn without charge for the purchase of a first home, in the case of terminal illness, or from age 60. Any unauthorised withdrawals will be subject to a 25% government charge on the total investment. The charge has the effect of recouping the government bonus, as well as an additional charge (which amounts to 6.25%, ignoring any interest or growth). This charge is made to reflect that the account is intended to be used for the specific purposes of home ownership and later life and therefore disincentivise withdrawals. Savings remain accessible where needed, subject to this additional charge.

The COVID-19 pandemic has caused financial disruption and uncertainty for many people, and for some this may have created a need to access savings unexpectedly. The government recognised the importance of LISA holders having access to their long-term savings during this time and wanted to make this as easy as possible. That is why it announced on 1 May 2020 that the LISA withdrawal charge would be reduced temporarily for any unauthorised withdrawal made between 6 March 2020 and 5 April 2021, effectively recouping the government bonus only.

The government was clear that the 20% withdrawal charge would be temporary, ending on 5 April 2021, and has no plans to permanently reduce this charge. The LISA provides savers with a highly generous government bonus of up to £1,000 a year tax-free. The government believes it is fair that this significant investment of public funds is targeted at individuals who save into a LISA for its intended purpose. It is right to protect the LISA’s status as a long-term savings product, discourage withdrawals that might be made in the absence of an additional charge and provide value for money for the taxpayer.

The government is committed to supporting people to save for the future. From 6 April 2021, LISA holders will remain able to continue to save and access any funds unexpectedly, subject to an additional charge representing the account’s intended purpose and long-term nature. A range of other savings products are also available for individuals that do not wish to save for these purposes or who wish to save on a shorter-term basis. The amount of money that people can save tax-free into their Individual Savings Account (ISA) each year has been increased to a record £20,000 and Budget 2021 has confirmed that this generous subscription limit will remain for 2021/22. As a result of this measure, a Personal Savings Allowance of up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers and the Starting Rate for Savings of up to £5000, around 95% of people with savings income pay no tax on that income. The government has introduced these measures to encourage individuals of all income levels and all ages to save, and more broadly has introduced the generous Help to Save scheme for those on low incomes and in receipt of certain benefits.

The government keeps all aspects of tax policy under review and considers the evidence and representations it receives carefully as part of that process.

HM Treasury