HMRC Hits UK Households with ’25 Per Cent Penalty’ after Cash Withdrawals
A recent report by HMRC has highlighted the need for changes to the Lifetime ISA to support young Brits in saving up and getting on the property ladder. According to financial experts, two key changes are required to make the scheme more effective.
The Lifetime ISA, introduced in 2017, was designed to help first-time buyers save for a deposit on a home. However, a new report by HMRC has revealed that many holders of the scheme are unaware of the steep withdrawal penalty of 25%. This has led to calls for the penalty to be reduced and for the price cap to be raised to help those hoping to buy in pricier areas.
The report has been analysed by Antonia Medlicott, Founder and Managing Director at financial education specialists, Investing Insiders. She believes that the 25% withdrawal penalty should be reduced and that even financially literate savers are unaware that they will be charged for taking money out early. Medlicott also thinks that the price cap needs raising to help those who are hoping to buy in pricier areas, as they are often unable to claim the bonus due to expensive properties.
Medlicott said: “When it works, the LISA is a powerful tool, especially for first-time buyers on modest incomes. However, there is little doubt that this is a product in dire need of reform.” She pointed out that the report states that even LISA holders who are highly financially literate were unaware of the steep withdrawal penalty of 25%, and thinks this is a large flaw in the product.
She added: “The friction to access funds is important to enhance saving discipline and ensure bonus money is only utilised for its intended purpose. However, penalising original contributions in unauthorised withdrawals leads to disproportionate losses for savers." Medlicott suggested that a change to the structure that would facilitate a loss to only the bonus while leaving the original funds untouched would be welcomed.
Medlicott also believes that the £450k cap requires examination, as it may have made sense in 2017 but today only serves to lock out would-be homeowners, especially in areas like London, where average property prices have surpassed this amount. She offered a solution to this, adding: “Regionally adjusted house price caps or inflation-indexed thresholds are a worthy consideration.”
As a financial educator, Medlicott sees firsthand how tools like the LISA can either empower or alienate young savers. She said: “When the product is misunderstood, the risk isn’t just lost money – it’s lost trust in the entire savings system.” Medlicott concluded that with the tweaks outlined in the report, coupled with a serious effort on consumer education, the Lifetime ISA could live up to its original promise.
The Birmingham Mail has learned that the current structure of the Lifetime ISA may be deterring young people from saving for a home. This is despite the scheme being designed to help first-time buyers. With the housing market continuing to rise, it is essential that the government considers changes to the scheme to make it more effective in supporting young Brits.
According to the Birmingham Mail, the report by HMRC highlights the need for changes to the Lifetime ISA. The newspaper reports that Labour is being told two key changes are needed to support young Brits being able to save up and get themselves on the property ladder.
The call for changes to the Lifetime ISA comes as many young people struggle to save for a deposit on a home. With house prices continuing to rise, it is becoming increasingly difficult for first-time buyers to get on the property ladder. The Birmingham Mail will continue to monitor this story and provide updates as more information becomes available.
The HMRC report has highlighted that an alarming number of Lifetime ISA holders are taking money out of the scheme early, and being hit with a 25% penalty as a result. This has led to concerns that the scheme may not be effective in helping young people save for a home.
The Birmingham Mail understands that there are approximately 4.5 million Lifetime ISA accounts, with many of these being held by young people who are struggling to save for a home.
This article was informed by reporting from Birmingham Mail and expert analysis from financial education specialists, Investing Insiders.
