Government urged to respond to Lifetime ISA petition
The penalty was temporarily cut to 20% to help those suffering financially due to Covid-19, but this reduction is due to end on 5 April 2021.
Hargreaves Lansdown created the petition to ensure the issue is discussed in Parliament, and make sure the reduction isn’t quietly withdrawn. It can be signed here.
What are the Lifetime ISA rules?
When people put money into a LISA they receive a 25% government bonus. The annual subscription limit is £4,000, meaning savers can receive a maximum of £1,000 as a top up.
LISA savers who withdraw money for a first house purchase, after the age of 60, or due to terminal illness get to keep the bonus.
Withdrawing money for any other reason, means they suffer a 25% penalty. This has the effect of clawing back the government bonus and penalising a further 6.25%.
For example, if someone pays £4,000 into a Lifetime ISA for retirement, they receive a government bonus of £1,000. But if they need to access the money and they withdraw the entire sum, they’d face a 25% penalty. This equates to £1,250, so it claws back the government amount and an additional £250.
Withdrawal penalty reduction
In March 2020, the Treasury reduced the penalty to 20%. This has the effect of the penalty only clawing back the government bonus and the additional 6.25% penalty doesn’t apply.
This reduction in the penalty was brought in so people who needed to access money they had saved due to the impacts of coronavirus were not excessively penalised.
However, this reduction only applies until 5 April 2021.
Nathan Long, senior analyst at Hargreaves Lansdown, said: “Younger workers and the self-employed have been hit hardest by the crisis, and although Boris’ announcement means we may be taking our first steps on the long road back to recovery, there are still many financial hurdles to overcome as we aim to build back better.
“The LISA withdrawal penalty is peculiar because it’s in place to help people stick with a savings plan that they’ve already voluntarily started. In reality, the withdrawal penalty means people are left worse off if they end up having to unexpectedly access their money in times of hardship, so at 25% the penalty actually acts as a disincentive to save in the first place which cannot be in savers’ best interests. Giving younger savers confidence to continue putting money aside for their future against an uncertain economic backdrop will help the next generation of house buyers and those saving for retirement without the help of an employer.”