Former Chancellor George Osborne’s Lifetime ISA looks set to become part of the long-term savings landscape after the Government belatedly published draft legislation setting out how the product will work.

Investors can now be fairly confident the new vehicle will launch as planned in April next year, although some major providers have said they may struggle to be ready in time.

It also seems the Lifetime ISA, at least initially, will be broadly similar in design to that announced in what turned out to be George Osborne’s final Budget as Chancellor of the Exchequer in March 2016.

Anyone under 40 will be able to pay in up to £4,000 a year into the Lifetime ISA and receive a Government bonus of 25%, up to a maximum of £1,000.

You’ll be able to keep paying in until age 50, although the legislation doesn’t give any indication you’ll be able to pay in any more than this. So if you want to save a bit extra you might need to consider setting up an ISA or pension if you don’t have one already.

If you have a Help to Buy ISA you will be able transfer those savings into the Lifetime ISA in 2017, or continue saving into both - but you will only be able to use the bonus from one to buy a house.

Withdrawals will be penalty-free in only very limited circumstances - namely if you’re using the money to put down a deposit on your first home (provided it is worth £450,000 or less), or if you take out money from your pot from the age of 60.

The Government had been considering expanding the circumstances for penalty-free withdrawals and potentially even allowing you to borrow from your fund, but neither is mentioned in the draft legislation.

The penalty for all other early withdrawals is severe - and we have crunched the numbers to give you an idea of just how much you could lose. While the Government described the exit charge as small, when combined with the return of the Government’s bonus it amounts to 25% of whatever money you take out.

While the Government described the exit charge as small, it amounts to 25% of whatever money you take out (including the loss of the bonus and any growth).

So, if you contribute the maximum £4,000 each year over 10 years you would have invested £40,000 and this would have been topped up with £10,000 of Government bonuses to give a total investment of £50,000.

If this grows at 4% per year after charges (the total return of the FTSE All Share index over the past 10 years was 5.8% annually) the fund will be worth £62,432 in our example. But let’s say you then decide you need the money for something else and take it out before age 60.

The 25% exit charge on our £62,432 example is an astonishing £15,608. This is the Government’s £10,000 contribution plus £5,608, which equates to 45% of all investment growth generated over the period.

That is not to say the Lifetime ISA is not worth considering. For first time buyers in particular it is a good deal, but you just need to be absolutely sure that you won’t need the money for any other reason because the penalties - no matter what the Government might claim - are severe.

Tom Selby

Senior Analyst, AJ Bell Youinvest