Lifetime Isas are effectively being unlocked temporarily for savers whose incomes have been hit by coronavirus.
The Treasury will make rule changes which will mean people can access their funds without facing the usual additional withdrawal charge.
Lifetime Isas, also known as Lisas, come with a 25% Government bonus.
They were set up specifically for people saving for their first home or their retirement. Savers withdrawing money for any other reason have previously faced hefty withdrawal charges.
But a temporary rule change is being brought in to help people who need to access to their money earlier as a result of the coronavirus outbreak.
It means that savers will generally get back all the money they originally put in, subject to any investment losses incurred by those who have their Lifetime Isas invested in stocks and shares.
I want to make it as easy as possible for people to access their savings during these unprecedented times. Thatâs why we are temporarily reducing the withdrawal charge for Lifetime ISAs. https://t.co/pG8dsz9Yut— John Glen MP (@JohnGlenUK) May 1, 2020
The Economic Secretary to the Treasury, John Glen said: “We know that some people are experiencing financial difficulties during these unprecedented times and we want to make it as easy as possible for people to access their savings, especially if it helps them avoid falling into high-cost or unmanageable debt.
“That’s why we are reducing the withdrawal charge for Lifetime Isas, so people can access their funds to help get them back on their feet. This is part of the wide range of support we have put in place to help people who have been affected by coronavirus with their finances.”
Previously, there has been a 25% charge for people withdrawing money from their Lisa for any other reason than buying a first home or taking a retirement income.
The Treasury will legislate for a temporary reduction in the Lisa withdrawal charge to 20% between March 6 2020 and April 5 2021.
This will generally mean account holders will only have to pay back any Government bonus they have received, and they will not have to pay the additional withdrawal charge of 5%.
For example, previously, if someone had put in £4,000, and received a 25% Government bonus of £1,000, they would have a total of £5,000 in their savings pot.
Under the previous rules, if they withdrew their funds early, they would be charged 25% of the £5,000 balance – which at £1,250 is a higher amount than the bonus they received. They would be left with £3,750 instead of the £4,000 they had put in.
But the new withdrawal charge at 20% means they would just pay the equivalent of the £1,000 Government bonus back – and they could keep the £4,000 they originally put in.
The rule change will be backdated to March 6, so anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.
Many banks have already waived early withdrawal charges on fixed savings accounts, to make it easier for people to access sources of cash at a time when their finances are under pressure.
Sir Steve Webb, a former pensions minister who is now a partner at consultants Lane, Clark and Peacock said: “This is a very welcome change.
“Many younger people may be particularly short of money during the present crisis but without this change they could not access funds in their Lifetime Isa without paying a penalty.
“It makes sense to allow people to access their own money when they need it most, and this will encourage them to save more when they are in a position to do so.”
Sarah Coles, personal finance analyst at Hargreaves Lansdown said: “Unfortunately, at the moment, it looks like this is just a temporary change. We want to see this become permanent.
“This crisis has shown us just how much our plans can change overnight, and the Lisa needs to be flexible enough for us to be able to roll with the punches.
“Dipping into your Lisa shouldn’t be your first port of call. Ideally you’ll have emergency savings in an easy access account to call on in difficult times. But given that life is proving less than ideal at the moment, being able to access your Lisa money without a penalty will come as an enormous relief to many.”
Richard Pearson, director of investment platform EQi said: “It is of course good news for anyone under financial strain that they can access their Lifetime Isa money in an emergency now without fear of extra penalty for withdrawal. It is the right decision from the Treasury.
“However, there must be a word of caution before anyone resorts to this. If the money is in a cash Lisa then it won’t be an issue to withdraw money saved for emergency reasons. But any money saved into an investment Lisa may be subject to the fluctuations of the stock market.
“As we have seen recently, markets have been severely troubled by coronavirus and therefore investors’ portfolio values could be diminished at the moment. Selling investments and withdrawing money now could crystalise losses and mean permanent reductions in the value of their savings. It should not be a decision taken lightly.”