Calls to reform the Lifetime ISA as thousands of savers hit with early access penalties
There are strict rules around accessing money from a LISA with a 25% penalty charged if money is taken out for reasons other than buying a first home or for retirement at the age of 60.
However, an increasing number of people are now facing these penalty charges as they dip into their LISA pots to help with rising costs.
In light of the cost-of-living crisis and the fact millions are struggling financially, many organisations are now calling for the penalty to be reduced.
Rising numbers of savers are making withdrawals
The number of Government penalties charged rose by 5,898, Hargreaves Lansdown customer data from 2022 revealed, with these savers hit with £4.6m in charges. In 2021, Hargreaves Lansdown savers accessing their cash early were hit with £5.1m in charges.
This is the equivalent of £793 per penalty in 2022 compared to over £1,000 in 2021.
The last set of Government data shows that for the year 2021 to 2022, the total value of penalty charges for LISA withdrawals was just over £33m, adding to the £34m recorded in the previous year.
Lifetime ISA rules and penalties
Savers aged between 18 and 39 can open a LISA where they can save £4,000 per year until they turn 50. The Government then adds a 25% bonus to this amount, to a maximum of £1,000 per year.
Yet if money is taken out and not used to buy a first home (worth up to £450,000) or if it’s used for something other than a retirement income after the age of 60, a 25% penalty is charged on the entire amount so it doesn’t mean the Government just claws back its bonus.
As an example, someone who saved £4,000 and received a £1,000 Government bonus who then wanted to withdraw the full amount would be charged a £1,250 penalty.
Another criticism is that the £450,000 house price cap was set in 2017 when LISAs were first introduced. Since then, house prices have soared, and analysts and experts say this hasn’t kept up with the changing housing market.
Many in the savings industry have called for this level to be changed including the The Building Societies Association (BSA) which suggested it should be increased to £550,000.
Hargreaves Lansdown, along with other organisations, is now calling for the penalty charge to be reduced to 20% permanently and for the Chancellor to address this in the upcoming Spring Budget.
At the start of the pandemic the charge was temporarily reduced to 20% but this only lasted until April 2021.
‘People are trying to do the right thing’
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The cost-of-living crisis continues to drain our finances and people face difficult decisions about their financial dreams and aspirations. Almost 5,900 of our customers had to access their Lifetime ISAs (LISA) during 2022 and incurred a penalty for having done so.
“It looks like people are taking less from their LISAs with penalties down to £4.6m compared to £5.1m in 2021 but it is clear people are feeling the pressure and reform is sorely needed.
“The penalty was temporarily reduced to 20% during the pandemic but has since been restored. We believe it should be reduced on a permanent basis.
“People are trying to do the right thing and build up their financial resilience and they shouldn’t be penalised for having to access them during tough times.”