I’m expecting my energy bills to go up by about £1,000 which means my emergency fund no longer covers six months’ fixed expenses.

I’m thinking of accessing £1,000 from my Lifetime ISA early to top up my emergency fund, but in doing so I’d pay a 25% charge.

Is it worth holding off for a bit just in case the Government reduces the early withdrawal charge?

Jason

Tom Selby, AJ Bell Head of Retirement Policy says:

Building a decent-sized ‘rainy-day’ savings pot is a cornerstone of sound financial planning. This pot of money should ideally be held in an easy access cash account paying the highest rate of interest available.

While clearly during periods of high inflation the real value of that money will be eroded, it is important to have some cash to cover any unexpected bills. Aiming for three to six months’ fixed expenses is sensible.

Millions of Brits have seen their living costs driven higher this year, primarily by surging energy bills caused by global supply and demand issues and exacerbated by the war in Ukraine.

As energy is a fixed expense the recent rise in costs means it makes sense to review your rainy-day pot to make sure it remains sufficient.

The average annual energy bill (for those on the price cap) increased £693 to almost £2,000 in April, with another £800 increase anticipated in October.

If your annual energy costs go up by £1,000 and you want to maintain a buffer covering six months’ fixed expenses, that implies adding around £500 to your rainy-day pot.

Anyone aged 18 to 39 can open a Lifetime ISA and pay in up to £4,000 a year. This money will then be topped up by a 25% government bonus, up to a maximum of £1,000 a year.

Once you have opened an account you can keep subscribing and receiving the Government bonus until your 50th birthday. The money can be accessed tax-free where it is used for a first home worth £450,000 or less, from your 60th birthday or in serious ill-health.

In all other circumstances your withdrawal will be subject to a 25% early withdrawal charge. Because this is applied to the entire withdrawal, it not only aims to reclaim the upfront bonus but acts as a 6.25% penalty too.

During the pandemic the Treasury cut this charge from 25% to 20%, meaning it was only aiming to return the government bonus.

There have been calls for ministers to provide similar support during the cost-of-living crisis but so far there has been no indication this will happen.

Given the impact of the early withdrawal charge, if you want to top up your rainy-day fund, consider doing it from other assets, such as a Stocks and Shares ISA, or from your salary if you can afford it.

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