Covid-19: changes to personal savings

To help investors who may be struggling during the pandemic, the withdrawal charge on a Lifetime ISA (LISA) has been temporarily reduced from 25% to 20%, with refunds planned for backdated charges

This change will apply from Friday 6 March 2020 until 11.59pm Monday 5 April 2021. It does not apply if the withdrawal is to buy a first home or the investor has a terminal illness.

This percentage reduction means that LISA investors will only lose the government bonus earned on the amount they withdraw.

For example: Investors who withdraw £1,000 from their LISA will lose the £250 government bonus earned on their original subscription. The value of their LISA will be reduced by £1,250 and the LISA provider will repay the £250 government bonus back to HMRC. 

There is no limit on how much an investor can withdraw from their LISA. 

Repayment

LISA managers who have deducted a 25% withdrawal charge will be able to correct this once HMRC update the LISA digital service, expected to be ready in June 2020, by submitting a new withdrawal charge to supersede the original one.

The refund will go back into the investor’s LISA if it is open. If the investor closes their account or it has a nil balance the refund can be paid directly to them.

On 6 April 2021, the LISA withdrawal charge will go back to 25% and will apply to all unauthorised withdrawals from a LISA made on or after 6 April 2021. 

Universal credit claimants

As the coronavirus pandemic continues and many are forced to turn to the welfare benefit system, the Low Incomes Tax Reform Group (LITRG) highlights to new universal credit claimants that they can open a four-year Help to Save account – which pays a tax-free bonus of up to 50p per £1 saved.

Eligibility

In order to be eligible to open a Help to Save account taxpayers:

  • must be in the UK;
  • cannot have previously opened a Help to Save account;
  • must be entitled to working tax credit and actually receiving either working tax credit or child tax credit payments; and
  • must be receiving universal credit and have earned income of at least 16 hours a week at the national living wage (from 1 April 2020, this is equivalent to £604.56 in a month) in their previous assessment period.

Once the account is opened, the claimant remains eligible for the scheme for four years even if they cease to meet those conditions, for example if they only claim universal credit for a short period (although there are certain restrictions if they later leave the UK).

The account pays a tax-free bonus on the second and fourth anniversaries of the date the account was opened. But the amount which can be saved is limited to £50 per calendar month.

Victoria Todd, head of LITRG, said: ‘While such individuals may not be in a position to save at the moment, the account remains open for four years from the point it is opened.

‘Therefore, it may be possible to take advantage of the scheme when financial circumstances improve and such individuals might no longer be claiming universal credit.

‘For those who claim universal credit as part of a couple, each partner can apply for their own Help to Save account if the eligibility conditions are met, further increasing the potential bonus payable.’

If an individual saves the maximum amount of £2,400 over the account’s four-year life without making any withdrawals, they will receive bonuses totalling £1,200.

Todd added: ‘The Help to Save scheme may provide individuals and families a much-needed boost to replenish their savings pots and to help re-stabilise their short-term financial security.’

Useful links:

How to report LISA withdrawal charges

Help to Save Technical Manual

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