In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk.
Question: I have a Lifetime ISA (LISA) but the property I am buying will be over the £450,000 price cap. So I transferred my LISA to a Stocks and Shares LISA. If I grow my money in this, am I effectively avoiding the withdrawal penalty of 25 per cent when I take my cash out?
Answer: Following last week’s question, where a reader found themselves potentially locked out of using their LISA for a home purchase, another reader got in touch to suggest an alternative approach.
Your savings in a LISA are topped up by a 25 per cent government bonus, but if you use the money before you’re 60 for any reason other than buying a first home under £450,000, you’re hit with a withdrawal charge.
Their idea is an interesting one. Rather than accepting the 25 per cent withdrawal charge, they suggested transferring from a cash LISA into a stocks and shares LISA and allowing the money to grow, in the hope that investment returns could offset the impact of the penalty over time.
It is worth saying at the outset that this is a legitimate option. You can transfer from a cash LISA into a stocks and shares LISA without triggering any penalty, provided the money stays within the wrapper. For some people, particularly those with longer-term plans, that can be a sensible move. But it is important not to overstate what this achieves.
At the heart of the reader’s argument is the idea that you can “outgrow” the penalty. Because the withdrawal charge effectively reduces your own contributions by 6.25 per cent – you get the 25 per cent bonus but then a 25 per cent penalty on the full amount post-bonus – the thinking goes that achieving returns above that level could leave you no worse off.
That sounds neat in theory, but it relies on a crucial assumption, that markets will deliver those returns when you need them to.
As we have seen repeatedly, including during the recent volatility around geopolitical events such as the Iran conflict, markets can move sharply and unpredictably. While the long-term trend has historically been upwards, the journey is rarely smooth. Periods of strong growth can just as easily be followed by downturns.
That is important because of your timeframe. The original question made it clear that the aim is to buy a property in the near term. And that is where this approach becomes much less comfortable.
If you move into a stocks and shares LISA now, you are exposing your house deposit to market risk. It could grow, but it could also fall. And if it falls, you do not just face a paper loss. You could end up withdrawing a smaller pot and still incurring the 25 per cent penalty, meaning the pound-and-pence loss is even greater.
In other words, this is not a way of sidestepping the penalty. It is a way of taking on additional uncertainty in the hope of offsetting it.
That trade-off may be worth considering if your plans have shifted and you are now thinking more long term. For example, if this money is likely to remain invested for many years, then a stocks and shares LISA can be an effective home for it. Over time, the combination of investment growth can be powerful. But that is a different objective.
For someone who remains focused on buying a home in the next couple of years, certainty matters far more than potential upside. Introducing investment risk at this stage can complicate planning and leave you exposed to outcomes you cannot control.
There is also a behavioural element to be careful of. It is very tempting to think of this as a way to “recover” the penalty, but in practice it means delaying the decision and relying on markets to do the work. That may pay off, but it may not, and the consequences of it not working are very real.
So the reader’s suggestion is a useful addition to the conversation, and it highlights an option that is sometimes overlooked. But it is not something I would describe as a straightforward or low-risk solution.
In simple terms, it swaps a known cost for an uncertain outcome. When your goal is clear and close, that is not always a trade worth making.
For those with a longer horizon, investing within a stocks and shares LISA can make a great deal of sense. For those hoping to buy soon, however, it is a strategy that needs to be approached with considerable caution.
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