The government is to waive a 25 per cent exit penalty on the Lifetime individual saving account (Lisa) for the first year after its launch.
The Lisa, which is set to launch in April 2017, will allow those aged under 40 to save up to £4,000 a year and receive a 25 per cent government bonus of up to £1,000 per year.
But as the Lisa is designed to help younger people save towards retirement or their first home, savers will be hit with a 25 per cent penalty if they withdraw the money for any other purpose. This 25 per cent charge removes the government bonus element, including any interest or growth on that bonus, by incorporating an additional charge of 5 per cent.
For example, if you saved the maximum amount over one year of £5,000, incorporating your personal contribution of £4,000 plus the maximum available government bonus of £1,000, the 25 per cent exit charge would remove the £1,000 government bonus plus £250 from your own contribution.
Jane Ellison, financial secretary to the Treasury, said the government had decided to scrap the exit charge in the 2017-18 tax year due to the way the 25 per cent bonus will be paid. From the 2018-19 tax year the government bonus on the Lisa will be paid on a monthly basis, allowing savers to benefit from compound growth on the bonus. However, in the 2017-18 tax year, the bonus will be paid in a lump sum at the end of the year.
"This could create a difficult case where people face a 25 per cent government charge up to 12 months before they receive the bonus," Ms Ellison told the House of Commons on 13 December. "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. If people want to withdraw from their Lifetime Isa in 2017-18, they must close their account, and there will be no government charge to do so. No bonuses will be paid on such closed accounts."
David Dalton-Brown, director-general of TISA, the investments and savings membership association, said: "It is great news for savers that the government has decided to drop the 5 per cent penalty charge for withdrawals within the first year of a Lisa. Over recent months we've argued strongly that the penalty charge of 5 per cent was simply unfair, particularly where no government bonus would be payable."
However hefty penalty fees will still apply to savers from 2018-19 onwards.
"The last-minute decision to scrap the Lifetime Isa's 25 per cent exit charge in its first year is a welcome one," said Calum Bennie, savings expert at Scottish Friendly. "If it had remained in place it would have made the product unfit for purpose in the first 12 months of its existence, which is a bad start by anyone's standards. "[However] concerns remain that the structure of the wrapper is fundamentally flawed because it's unnecessarily inflexible for most customers due to the exit charges in subsequent years, and the industry will need to show an uncharacteristic flair for innovation to overcome this problem with its design."
