HMRC rakes in £9m from Lifetime ISA penalty charges
Lifetime ISA savers have been forced to hand back a whopping £9m in penalties for accessing their cash earlier than permitted.
Young people who opened a Lifetime ISA either to buy their first home or to build up a pension nest egg have been hit with charges in excess of £9m for taking money out of the scheme.
The Lifetime ISA launched in April 2017 for those aged 18-39. Up to £4,000 each tax year can be put away towards a property or pension and the amount receives a government bonus of 25% (up to £1,000 a year).
The funds can be withdrawn free of charge once the account holder buys their first home or reaches the age of 60. Any other withdrawals are subject to a 25% penalty charge on the whole amount.
This means not only do they have to hand back the government bonus, but they also face an additional penalty charge on any withdrawals leaving them with less money than they started with.
As an example, someone putting £80 into a LISA would see the government top it up to £100. But if they want their money back, they have to hand over the original £20 top-up and a further £5. This means their original £80 has been reduced to £75.
The data, obtained by mutual insurer Royal London reveals that when the first withdrawal charges were levied in 2018/19, a total of £4.35m was paid to HMRC. But a further £4.69m has been paid in the first seven months of 2019/20.
‘Figures are a stark reminder that things can change’
Steve Webb, director of policy at Royal London, said: “A Lifetime ISA can be attractive for those who are clear about their plans to put down a deposit on a house and who are confident that they won’t need the money for any other reason.
“But these figures are a stark reminder that things can change. People who change their plans after saving in a LISA are finding that not only do they have to pay back the government top-up but they face a penalty charge as well. This leaves them with less money than they started with.
“It is hard to see why the government should fine people whose only ‘crime’ was to put money aside in the hope of buying a home and then see their circumstances change. The LISA would be a much more attractive product if this penalty charge was abolished.”