Charge-free Lifetime ISA withdrawals if terminally ill

A Lifetime ISA normally charges you 25% of whatever you take out before you turn 60, unless the money is going towards a first home. Terminal illness is one of the exceptions. If a medical practitioner confirms in writing that you are expected to live for less than 12 months, you can withdraw the whole balance, including the government bonus, without the charge, and at any age¹.

The charge exists to claw back the government bonus, so avoiding it matters. The withdrawal charge recovers the government bonus you received on your original savings¹. The effect of paying it is that a holder loses the government bonus plus 6.25% of their own contributions³. A terminal illness withdrawal is treated as a life event, so none of that applies.

Once qualifying evidence has been accepted, any subsequent withdrawals are charge-free⁴. You do not have to empty the account in one go, and the account does not have to be closed. If you die, the Lifetime ISA ends on the date of your death and there is no charge to withdraw the funds or assets¹.

Terminal illness lifts the Lifetime ISA withdrawal charge

The Lifetime ISA is designed around two life events: buying a first home and retirement. Money taken out for anything else before age 60 attracts a 25% withdrawal charge⁶. Terminal illness sits alongside those life events as a recognised reason to take money out without paying it.

The rule has been part of the scheme since it was designed. The government's technical note set it out plainly: if a Lifetime ISA holder is terminally ill and has less than 12 months to live, they will be able to withdraw all of the funds, including the bonus, without a government charge². The same document confirms the exemption applies regardless of the holder's age².

Providers describe it in the same terms. HSBC tells customers that in certain circumstances, such as terminal illness with less than 12 months to live, or upon death, there is no charge to withdraw⁷. Skipton Building Society notes that the charge does not apply unless you are diagnosed with a terminal illness⁸. AJ Bell and interactive investor both describe the penalty-free terminal illness route in their Lifetime ISA material⁹.

The charge itself has not always been at its current level. It was temporarily reduced to 20% during the pandemic, applying from Friday 6 March 2020 until 11:59pm Monday 5 April 2021¹¹. That reduction has ended, and the standard figure is 25% of the amount withdrawn for any withdrawal that is not the result of a life event⁶.

Who qualifies: less than 12 months to live

The test is not a diagnosis in the abstract. It is a medical opinion about how long you are expected to live. The Lifetime ISA rules treat an account investor as terminally ill if the account manager has received written evidence from a registered medical practitioner that the investor is expected to live for less than one year⁵.

That 12 month threshold is the same one used across the benefits system, which is useful because the evidence you gather for one purpose often serves the other. For Personal Independence Payment and Attendance Allowance under the special rules, you can apply if your doctor thinks you are likely to have less than 12 months to live¹³. For many benefits, including PIP, ESA, Universal Credit and Attendance Allowance, a healthcare professional needs to confirm that they think you might have less than 12 months to live¹⁴.

There is no age condition on the Lifetime ISA exemption. You must be 18 or over but under 40 to open a Lifetime ISA in the first place¹⁶, and you must open it before your 40th birthday¹⁷. Once it is open, the terminal illness rule applies at any age, which is what makes it different from the ordinary age 60 route.

One practical point sits alongside this. A Lifetime ISA must normally be open for at least twelve months before you can use it towards a first home¹⁸. That minimum holding period is about the first home life event, not about terminal illness, and the terminal illness exemption is not written with a holding period attached.

Medical evidence you need to provide

The evidence requirement is written into the regulations: written confirmation from a registered medical practitioner that you are expected to live for less than one year⁵. What that looks like in practice depends on your clinician and your provider, but the forms used elsewhere in the system give a good idea of the shape of it.

For benefits claimed under the special rules for terminal illness, the SR1 form is the standard route. You need an SR1 medical form if your health professional thinks you might have less than 12 months to live²⁰. In Scotland, the equivalent is the BASRiS form, which your doctor or nurse fills out to say that you have a terminal illness²¹. MyGov Scotland confirms that claims under the special rules can be supported by a DS1500 form or SR1 form, or by a phone call or letter confirming the terminal illness²².

Some schemes accept lighter evidence. Carers UK notes that a phone call or letter providing confirmation of the terminal illness can be enough for some claims²³. Macmillan's guidance on the special rules says you can apply if your doctor thinks you are likely to have less than 12 months to live¹³.

For the Lifetime ISA itself, the requirement is the written evidence from a registered medical practitioner⁵. If you are dealing with a provider that asks for a specific form, the SR1 or BASRiS route is the one most clinicians will already recognise, and asking your doctor for an SR1 form is the standard first step for a terminal illness claim²⁴.

What you can take out: the full balance, including the bonus, at any age

The exemption is not limited to your own contributions. The government's technical note states that a terminally ill holder with less than 12 months to live can withdraw all of the funds, including the bonus, without a government charge². That is the whole account balance, not a capped amount.

This is the point that separates the terminal illness route from an ordinary early withdrawal. Take money out of a Lifetime ISA before 60 for anything other than a first home and you pay 25% of the amount withdrawn⁶. Because the charge is calculated on the amount you take out, you have to withdraw more than the amount you need, to cover your needs and the 25% withdrawal charge¹. The charge recovers the government bonus you received on your original savings¹, and the combined effect is that a holder loses the government bonus plus 6.25% of their own contributions³.

The Financial Ombudsman Service has handled cases where the charge caught people out. In one, a customer was told she would lose her government bonus because the Lifetime ISA had been open less than 12 months, and any withdrawal would trigger a charge²⁵. In another, a customer transferring money between different ISA types faced an unexpected withdrawal charge²⁶. These are the outcomes the terminal illness exemption is designed to avoid for people in that position.

The Financial Conduct Authority's rules require firms to warn clients about what the charge does. Firms must warn that the charge recovers any government bonus and any investment growth on that bonus plus an additional amount, and that the client could receive back less than they paid in²⁷. If you are making a terminal illness withdrawal, that warning should not apply to you, but it explains why the exemption is worth confirming with your provider before you take anything out.

Later withdrawals and what happens to the account on death

Accepting the evidence once is enough. Once a terminal illness claim has been accepted, any subsequent withdrawals will be charge-free⁴. That means you can take money as you need it rather than emptying the account immediately, and the account can stay open and invested in the meantime.

The scheme's own list of charge-free withdrawals confirms the position. Withdrawals that are not subject to a withdrawal charge include first time residential purchases, reaching age 60, death or terminal illness of the investor, payments removed from an invalid account, management fees paid directly to the ISA manager, a manager declared in default by the FCA or FSCS, an act, omission or circumstance not caused by the investor, and recoupment and repayment of an incorrect government bonus to HMRC⁶. The government's policy statement puts it more briefly: these circumstances include a withdrawal made after an account holder reaches 60, becomes terminally ill, or dies¹⁷.

On death, the account ends. If you die, your Lifetime ISA ends on the date of your death, and there is no charge to withdraw the funds or assets from your account¹. Since 6 April 2018, the Lifetime ISA can remain open as a continuing account of a deceased investor⁴. Lifetime ISAs have the same inheritance tax treatment as other ISAs, and on the death of the account holder the account forms part of the estate².

Two related points are worth knowing. You can transfer money from a Help to Buy ISA to a Lifetime ISA, but if you transfer money from a Lifetime ISA to a Help to Buy ISA you will have to pay the 25% withdrawal charge¹. And you can transfer your Lifetime ISA into another Lifetime ISA without triggering the government withdrawal charge, whereas a transfer to a different ISA type is subject to the 25% charge²⁹.

The Lifetime ISA itself is not being withdrawn. The government has said it will remain possible to open a Lifetime ISA until a new product becomes available, and for account holders to continue to save into their Lifetime ISA in line with the existing rules³⁰.

Where to get help

If you are dealing with a terminal illness diagnosis and money is part of what you are sorting out, free and impartial help exists. MoneyHelper provides guidance on savings, ISAs and later life planning. For benefits, Macmillan, Marie Curie and Turn2us all publish guidance on the special rules for terminal illness and the forms involved¹³. Carers UK covers the benefits position for people who are disabled, ill or injured²³.

If a provider applies the withdrawal charge when you believe the terminal illness exemption should apply, you can complain to the provider first and then take the complaint to the Financial Ombudsman Service, which is free to use. The ombudsman has published case studies on Lifetime ISA withdrawal charges, including cases where customers were caught out by the charge²⁶.

For the wider rules on how the charge works, how ISAs are protected and what happens to an ISA when someone dies, the site's pages on the Lifetime ISA withdrawal charge, how your ISA is protected and what happens to an ISA when someone dies set out the detail.