Lifetime ISA bonus to be paid monthly

Aegon has welcomed the decision, stating that the previous proposal, coupled with the charges levied on customers who withdraw early other than for house purchase, would have created "huge disincentives."

Under the previous proposals, an individual who paid in £4000 on 6 April 2017 would have received a £1000 bonus shortly after 5 April 2018. If they the paid in a further £4000 on 6 April 2018, their LISA pot would equal £9000. But if they then withdrew their money other than to buy a first home on say 1 January 2019, the Treasury would deduct a 25% charge on the full £9000, or £2,250, leaving £6,750. The deduction is far greater than the £1000 bonus paid.

Under the new proposal, the LISA provider will be able to claim the bonus on the second £4000 at the end of the month, meaning the individual will have £10,000 on 1 January. The 25% exit charge of £2,500 is still greater than the £2000 bonus received, meaning those investing in LISA really should do so only if they plan to use the proceeds for first house purchase or for retirement.

The government also confirmed that it will provide a bonus of 25% on all contributions to a Lifetime ISA, but not on any interest or investment growth.

This means that if an individual invests £4,000 in a year, but after investment the pot decreases before the claim is made, they will still be entitled to a bonus of £1,000.

The recent Savings Bill confirmed the Treasury has opted to keep LISA simple. Penalty-free withdrawals will be permitted to purchase a first home of up to £450,000, after the age of 60, if terminally ill or on death.

The government is unlikely to allow the option of borrowing from the Lifetime ISA, which it had previously considered.

Steven Cameron, Pensions Director at Aegon, said: “The Treasury has listened to the industry and will pay the LISA bonus on a monthly basis from the 2018 / 19 tax year. The earlier savers receive their bonus, the sooner it can start earning investment growth or interest.

“If the bonus had been paid only after the end of each tax year, some individuals who withdrew their funds mid-tax year could have faced a 25% loss on contributions which had not benefitted from the Government bonus. We’re pleased the Treasury has removed this major design flaw.”

True Potential Managing Partner, David Harrison, added: “This clarity from the Government is welcome and it confirms that the 25% bonus will be paid monthly from 2018. That's good news for savers who will get compound growth on it in the same tax year. Once it is launched, the potential to help close the savings gap is huge. We need more details from FCA now but if they are forthcoming sooner rather than later, True Potential will be offering the Lisa in 2017.”