The full 25% lifetime Isa withdrawal penalty will be back in the new tax year, the government has confirmed.
Last year, the 25% lifetime Isa withdrawal penalty was reduced to 20% for withdrawals made from 6 March 2020, to help savers struggling as a result of the coronavirus crisis.
Despite calls to extend the lower penalty, the government plans to restore the 25% charge from 6 April 2021.
Here, Which? explains how lifetime Isas work, how much the penalty change will cost savers and looks at whether you should get one ahead of the new tax year.
The lifetime Isa is a tax-free account designed to help younger people buy their first home or save for retirement.
Adults aged between 18 and 39 can open a cash lifetime Isa, which will pay interest, or a stocks and shares lifetime Isa that could benefit from investment growth.
The government will pay a bonus worth 25% of what you pay in, up to £1,000 every tax year until you turn 50 years old.
Up to £4,000 a year is eligible for the 25% bonus (you can add more but it won't receive a government contribution).
The money saved in a lifetime Isa is meant to go towards the purchase of a first property or to help fund your retirement once you reach 60 years old.
If you withdraw money for any other reason, you will currently face a 20% penalty (or 25% from 6 April 2021) on the amount withdrawn.
The only exception to this is if you've been diagnosed with a terminal illness and have less than 12 months to live, in which case you can withdraw all of the funds (including the bonus) tax-free and penalty-free, regardless of age.
Below are two examples of what charges you will face under the 20% and 25% penalty.
The 20% penalty effectively meant you only lost out on the government bonus if you needed access to your savings for an unauthorised reason. The 25% penalty will mean you will lose the government bonus plus 6.25% of your original investment.
So you should think carefully about whether a lifetime Isa makes sense for your circumstances in the new tax year.
If you want to buy your first home within the next year, you won't benefit from a lifetime Isa, as funds can only be withdrawn after 12 months.
Otherwise, a lifetime Isa may be worth considering.
You're also not limited by a monthly deposit cap - with the Help to Buy Isa you can only save £200 per month, but with the lifetime Isa you can add cash as a lump sum.
Lifetime Isa bonuses can be used towards more expensive properties. With the Help to Buy Isa, you can only buy a house worth up to £250,000 (or £450,000 in London), while the lifetime Isa allows you to buy a home worth up to £450,000 anywhere in the UK.
You can also choose to open a lifetime Isa alongside a Help to Buy Isa. However, you can only use the government bonus from one of these accounts to buy your first home. You can transfer money in your Help to Buy Isa to a lifetime Isa, but this will count against the lifetime Isa contribution limit for that year.
But you might want to save into both - and the government has stressed that the lifetime Isa isn't a replacement pension but rather an additional savings vehicle.
The lifetime Isa is likely to be the best option for you if:
A traditional pension is likely to be the best option for you if:
To open and continue to pay into a lifetime Isa you must be a resident in the UK, unless you're a Crown servant (for example, in the diplomatic service), their spouse or civil partner.
You should be able to apply online or call a provider's customer services line if you're stuck, for help over the phone.
There are currently 15 lifetime Isa providers on the market, offering either cash or stocks & shares investment options. These include the likes of Hargreaves Lansdown, Nutmeg and Moneybox.