Lifetime ISA withdrawal penalty: What is it and how to avoid it?

What is the Lifetime ISA government withdrawal penalty?

The government’s early withdrawal penalty on a Lifetime ISA is a 25% charge of the money you take out. That means you’ll have to give back all of the government bonus you've received so far, plus a bit of your own money. The amount of your own money you have to hand over on top of the bonus equates to 6.25% – that's £6.25 for every £100 you're withdrawing.

For example... 🔍

Let’s say you put £1,000 into your Lifetime ISA. The government gave you 25% of that (£250), so you now have £1,250 in your account. 🎉

But you want to take out the full balance of £1,250 before buying a home, for something else, like an expensive hen do for your friend that's getting seriously expensive. ✈️

So, you have to pay the government's 25% early withdrawal fee (25% of £1,250 = £312.50). The amount left that you can withdraw = £937.50. 👛

Thinking of opening a LISA? Sign up to Tembo on our award-winning app.

Are there any exceptions to the government’s LISA withdrawal penalty?

You can withdraw money from your LISA without incurring the government withdrawal penalty if you are:

• Transferring your savings to another LISA provider. Transfer to Tembo today to benefit from our market-leading interest rate.
• You’re aged 60 or over and want to use your savings to fund your retirement.
• To purchase your first home (as long as it meets the property requirements, more on this below).
• If you’re terminally ill or you’ve passed away, you or your relatives won’t be charged the early withdrawal fee.

How to avoid the government withdrawal charge on your Lifetime ISA

1. Remind yourself of the LISA withdrawal rules

Remember that you can only use your Lifetime ISA to buy a home under specific conditions:

• You’re buying your first home (i.e. you don’t already own a home or have part-ownership on another property).
• The property you’re planning to buy has to be in the UK and worth no more than £450,000.
• You need to be using a mortgage to buy the property (i.e. you can’t pay for it in full upfront).
• You have to live in the property once you buy it (i.e. you can’t use a LISA to buy a property you want to rent out).
• It doesn't matter if you're buying with someone else who is not a first-time buyer, you can still use a Lifetime ISA for your half of the purchase. Read our guide on the Need to knows for first-time and second-time buyers purchasing together.

Psssttt! Screenshot this to remind yourself later

2. Open your Lifetime ISA at least 12 months before you buy a home

You can’t use a LISA to buy a home unless your account has been open for 12 whole months or more - and the clock only starts ticking once you’ve deposited money into the account. If you plan on buying a home before that 12-month mark and want to use the money in your account for your deposit, you’ll have to pay the early withdrawal fee. So pushing back your home purchase to after this point can be a smart move. 

Plus, buying a home can take longer than you think - from start to finish it can take between 2-7 months depending on how quickly you find a home you like, and if you can get the loan size you need (Psstt! Our mortgage team can help if you’re struggling to get the mortgage you need).

You might also like: Timeline of buying your first home

3. Prepare for emergencies

Things can be difficult when an emergency comes up and all of your savings are in a Lifetime ISA. Instead, it’s a good idea to build up an emergency fund in a separate savings account that you can easily access without paying any withdrawal fees. Usually, an emergency fund is at least 3 months of your salary, so that you can be covered for costs like costly car repairs, vet bills or living expenses if you’re made redundant or in between jobs.

4. Think yearly, not monthly

With a Lifetime ISA, there are no rules on how much you can put in each month. Instead, you’re given a yearly maximum of £4,000. This can be useful if you’re worried about your money situation right now.

Here’s an example of why this matters…

Harper hasn’t saved an emergency fund. So, she drops her monthly LISA contribution from £333 to £100. This way, she has an extra £233 to keep at hand in case she needs it. 💸

2 months later, her MOT costs more than she thought it would. Thankfully, she doesn’t have to dip into her Lifetime ISA and pay any early withdrawal fees.  🚗

Later that year, Harper gets a big bonus from work and has been actively saving money for an emergency fund. She’s in a better place financially than she was before. 🙌

So, before the tax year ends, Harper puts £2,800 into her Lifetime ISA in one big chunk. 💰

With a Tembo Lifetime ISA, you can top up your house fund savings with a direct debit each month, or in one go with our one-off contribution feature 🚀

5. Ask your solicitor to withdraw your money for you

When you’re ready to buy a house, your solicitor or conveyancer will contact your LISA provider for you to transfer your funds. This is the process because it proves to the government that you’re using your LISA to buy a home.

If your offer’s accepted on a home and you withdraw the money from your LISA yourself, you’ll pay the 25% early withdrawal fee even though it’s technically not early.

6. Keep your LISA savings for retirement

If something happens and you can’t use your Lifetime ISA to buy your first home, you can keep your money in your Lifetime ISA and use it for retirement instead to avoid the government withdrawal charge. When you turn 60, you can take it out fee-free!

However, if you choose to withdraw your funds before you reach the age of 60 for any reason other than buying a first home or due to terminal illness, you will still incur the government's 25% early withdrawal fee.

What happens if you pass away before you use your LISA savings for retirement?

If you pass away before you can use your LISA savings for retirement, the funds in your Lifetime ISA will become part of your estate on your death. This means they will be passed onto your beneficiaries according to inheritance laws.

Are there any penalties for transferring funds from a Lifetime ISA to another type of savings account?

If you want to transfer your LISA savings to another type of account like a traditional savings account (for example to create an emergency fund) you will be hit by the government’s withdrawal penalty. This is because the transfer is classed as an ineligible withdrawal as it’s not to buy your first home or to fund retirement.