It’s also worth remembering that Lisas do give flexibility to access funds early – albeit with a penalty - if really needed.

When the penalty applies

When the Lisa was introduced the withdrawal penalty was set at 25 per cent. At first glance this looks like it simply claws back the 25 per cent bonus, but simple analysis shows this is not the case. 

If the maximum £4,000 is paid in the 25 per cent bonus is £1,000, so there is £5,000 in the account. When the full amount is withdrawn the 25 per cent charge is applied to £5,000, so £3,750 is returned to the account holder with £1,250 sent to HMRC by the ISA manager. 

In the wake of the pandemic the government recognised that Lisa savers may need to access funds, and from 6 March 2020 until 5 April 2021 the rate was cut from 25 per cent to 20 per cent. At 20 per cent the charge is a simple reclaim of the government bonus. 

In the recent Budget several pandemic-related support programmes were prolonged, and it was perhaps disappointing that the Lisa withdraw reduction charge was not one of them. With the inevitable removal of furlough there will be many that may find themselves forced into withdrawals in 2021/22 at the higher rate of 25%. Of course, it could be argued that a simple clawback of the government bonus would be fairer regardless of the pandemic.  

Lisa Webster, senior technical consultant at AJ Bell