Lifetime ISA Savers Warned of Hidden Penalties
A savings product designed to help first-time buyers has been criticised for its "unfair" withdrawal rules, which could leave savers with less money than they originally invested.
The Lifetime ISA (LISA) was launched in 2017 to help individuals save for their first home or retirement. However, experts warn that the 25% withdrawal charge for non-qualifying uses is not just a clawback of the Government’s bonus, but also takes a portion of the saver’s own contributions.
According to Rachael Griffin, tax and financial planning expert at Quilter, "HMRC’s recently published ‘Understanding the Use of the Lifetime ISA’ report lays bare the confusion that remains. In particular, the revelation that even financially literate savers, including those actively contributing to their LISA, did not realise that the 25 per cent penalty on non-qualifying withdrawals can leave them with less than they originally invested."
The report from GB News highlights the issue, citing an example of a saver who deposits £4,000 and receives the £1,000 government bonus. If they withdraw the full amount early, they would lose £1,250, ending up with just £3,750.
Griffin explained, "People simply do not realise it’s not just a clawback of the government bonus. It’s a loss on their own money." The scale of the problem was revealed through Freedom of Information data obtained last year, which showed that around 74,000 savers were hit with penalties in 2022 to 2023, including nearly 16,000 who lost £1,000 or more.
The data also revealed that more than 6,100 savers faced penalties above £2,000 and a further 851 individuals were charged over £5,000 each. These figures have fuelled calls for urgent reform of the LISA withdrawal rules, with many critics arguing that savers are being punished for needing to access their own money.
Griffin argues that the Lifetime ISA is failing in its current form and should be redefined as a "First Homes Account." She suggests that the product’s dual-purpose design creates confusion, especially when compared to clearer and more efficient retirement options like pensions.
To address these concerns, Griffin calls for a reduction in the 25% withdrawal penalty and updates to the outdated age and property price caps. While she does not support scrapping the LISA entirely, she believes its scope should be narrowed to focus solely on helping first-time buyers.
The number of LISA accounts has grown significantly since its launch, with over 1.3 million accounts opened in 2023, compared to 64,000 in 2017. However, only 228,000 savers have used their LISA to buy a first home, raising questions about the scheme’s effectiveness in supporting first-time buyers.
As the new £20,000 ISA allowance resets, experts say now could be the ideal time to review savings and make the most out of one’s money. With the current rules, savers risk facing significant penalties if they need to access their savings early. As Griffin notes, "Once they understood this, there was broad consensus that the current rules feel unfair and that the withdrawal charge should be reduced to 20 per cent."
The GB News report suggests that a reduction in the withdrawal penalty would allow savers to break even in cases where circumstances force them to access their savings early.
In conclusion, while the Lifetime ISA was designed to help individuals save for their first home or retirement, its current rules and penalties have been criticised for being unfair. Experts argue that urgent reform is needed to address these concerns and ensure that savers are not punished for needing to access their own money.
Original Source: GB News
