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

Key takeaways

• The penalty: A 25% charge applies to unauthorized withdrawals, meaning you lose the government bonus plus roughly 6.25% of your own savings.
• Valid uses: You can withdraw fee-free to buy your first home (up to £450k), after age 60, or in cases of terminal illness.
• The 12-month rule: Your LISA must be open and funded for at least 12 months before you can use it for a home purchase without a penalty.
• Professional handling: To avoid the fee during a home purchase, your solicitor must manage the funds transfer directly.
• Emergency planning: Maintain a separate emergency fund to avoid being forced to withdraw from your LISA for unexpected costs.

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, officially known as an "unauthorised withdrawal." 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:

• Your contribution: £1,000
• Government bonus (25%): +£250
• Total account balance: £1,250
• Withdrawal penalty (25% of total): -£312.50
• Final amount you receive: £937.50
• Net loss: £62.50 of your original savings

What about a partial withdrawal? 🔍

If you only want to take out some of your savings, keep in mind that you'll need to withdraw more than the amount you actually need to cover the 25% charge.

For example, if you need £120 in cash, you'd have to withdraw £160. The government takes 25% of that (£40), leaving you with the £120 you need. It's a bit of a head-scratcher, but worth knowing before you make any requests! 🧮

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're buying your first home, as long as:

• The property is in the UK and costs £450,000 or less
• Your Lifetime ISA has been open and funded for at least 12 months
• You're using a mortgage to buy the property. Private mortgages from parents, grandparents, siblings, or a spouse or civil partner do not qualify. See GOV.UK
• A conveyancer or solicitor must act for you, and your LISA provider will pay the funds directly to them
• You plan to live in the property, rather than rent it out
• You’re aged 60 or over and want to use your savings to fund your retirement
• You’re terminally ill
• You're transferring your savings to another LISA provider
• You've passed away, in which case the funds pass to your estate without the 25% charge

How to avoid the Lifetime ISA withdrawal penalty

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 use a mortgage to buy the property (i.e. you can’t pay for it in full up front). Private mortgages from relatives like parents, grandparents, siblings, or a spouse/civil partner don’t qualify for a penalty-free withdrawal either. See the GOV.UK rules
• A solicitor or conveyancer has to act for you, and your LISA provider will pay the funds directly to them
• 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. If you’re both first-time buyers, you can both use your own Lifetime ISAs. 

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. 💰

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 and ask them to transfer the money. Your provider will then pay the funds directly to your solicitor or conveyancer, which proves to the government that you’re using your LISA to buy a home.

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, your Lifetime ISA will close on the date of your death and the funds will become part of your estate. This means they will be passed onto your beneficiaries according to inheritance laws.

Importantly, no government withdrawal charge applies in this situation, so your loved ones won’t lose any of the bonus or savings to the 25% penalty. 

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 Cash ISA, Stocks & Shares ISA, or a traditional savings account, it counts as an unauthorised withdrawal, and you’ll pay the government’s 25% withdrawal penalty. See GOV.UK.

However, transferring your savings from one LISA provider to another is completely penalty-free. So if you're not happy with your current provider's interest rate or features, you can switch without losing your bonus.

How long does it take to get money out of a Lifetime ISA?

How long it takes depends on why the money is being withdrawn:

• Buying a first home: The solicitor or conveyancer submits the request, and most providers process and transfer the funds within 30 days. Readers should build this into their conveyancing timeline.
• Retirement (age 60+): The account holder contacts the provider directly, and funds typically arrive within a few working days to two weeks.
• Unauthorised withdrawal (25% penalty applies): Similar provider-dependent timeline of a few working days to two weeks.

It’s worth checking processing times with the specific provider before relying on the funds by a set date.

What is the downside of a Lifetime ISA?

There are a few potential downsides to keep in mind before opening a Lifetime ISA:

• The withdrawal penalty is steep: A 25% charge means losing the bonus plus 6.25% of personal contributions.
• The property price cap: The £450,000 limit can restrict usefulness in high-cost areas.
• The 12-month waiting period: The account must be open and funded for at least a year before a home purchase.
• Lower annual contribution limit: The annual Lifetime ISA limit is £4,000, compared with the £20,000 overall ISA allowance.
• Limited flexibility: The money is not freely accessible, making a separate emergency fund important.

For most first-time buyers at least a year from purchasing within the £450,000 cap, these restrictions are manageable but anyone unsure about their timeline should consider whether a Lifetime ISA is the right fit.

*Fee-free mortgage advice is subject to eligibility, see terms & conditions here.