"We have listened to representations on this point, and so, to improve the product for consumers, I can confirm that there will be no Government charges in 2017-18."
Speaking in the House of Commons this week, Financial Secretary to the Treasury, Jane Ellison, said that if people want to withdraw from their lifetime ISA in 2017-18, they must close their account. There will be no Government charge to do so, however no bonuses will be paid on the account.
Ellison said: "The 25% Government charge on unauthorised withdrawals from the lifetime ISA recoups the Government bonus and applies a small additional charge. This is fair as it reflects the long-term nature of the product and ensures that individuals save into it for the intended purposes, protecting Government funds and taxpayers’ money.
"However, in 2017-18 only, the bonus will not be paid monthly, as it will be from April 2018 on, but will be paid as an annual bonus at year-end. This could create a difficult case where people face a 25% Government charge up to 12 months before they receive the bonus. We have listened to representations on this point, and so, to improve the product for consumers, I can confirm that there will be no Government charges in 2017-18.
"An individual who has closed their account will be able to open another lifetime ISA in 2017-18 and contribute up to £4,000 into it, if they wish to. From April 2018 the Government bonus will be paid monthly. This means that the 25% Government charge on withdrawals other than for a first-time house purchase, in the event of terminal illness or when the individual is over 60 will apply as per the overarching policy intention."
However Steve Webb, Director of Policy at Royal London and former pensions minister, says that the government risks creating confusion with last minute changes to LISA rules.
Webb said: “This announcement is a further sign that the Lifetime ISA has not been properly thought through. The new product, which is a complex hybrid between a pension and an ISA, is due to be implemented in just a few months’ time, and yet the Government is still making up the rules as it goes along.
"To have one set of rules on withdrawals for 2017/18 and another for the year after, and to move from annual government top-ups in 2017/18 to monthly ones in 2018/19, will add yet more confusion to an already complex product.
"It is not too late for the Government to admit that the LISA risks undermining the real progress that has been made on getting young people saving through a workplace pension under automatic enrolment, and to reconsider the whole project. At the very least the Government should hold off launching the LISA until the process of automatic enrolment is complete and every employee has access to a good workplace pension.”
Rachel Vahey, product technical manager at Nucleus, commented: “This is a welcome clarification from the Government. The bonus will not be distributed until after the end of the tax year, so this should make operating a LISA easier in the first year for providers and Government alike.
“But this is a simple tidying up of administration, not an easing of policy. Instead, in the future many people will be left in the position of facing a 6.25% charge in their contributions if they decide - either through choice or necessity - to take their funds early.
“LISA is being positioned as an ISA, and as such should offer investors flexibility. We don't believe such a high withdrawal charge is warranted.”
