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Government urged to revisit Lifetime ISA withdrawal penalty charge

Written by: Emma Lunn
HMRC reclaimed £34m in Lifetime ISA (LISA) withdrawal charges in the 2020/21 tax year – a more than threefold increase on the previous tax year.

The figures were revealed after a Freedom of Information request from investment company Hargreaves Lansdown. 

LISAs enable savers to contribute up to £4,000 per tax year with the government adding a 25% bonus (up to £1,000 a year).

If someone chooses to make a withdrawal from their LISA for a purpose other than to buy a home or for retirement, they are hit with a 25% penalty charge.

So someone who saved £4,000 and was given £1,000 by the government, who wanted to withdraw the full £5,000 would be charged a penalty of £1,250 (25% of £5,000).

The government reduced the LISA withdrawal charge from 25% to 20% between 6 March 2020 and 5 April 2021 to allow people to access their money during the pandemic and only lose the government bonus. 

Hargreaves Lansdown has  launched a petition calling for the 20% charge to remain, following repeated calls for the charge cut to be made permanent.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “The pandemic wrought a huge financial toll on young people, and this can be shown in how they raided their LISAs to fill gaps in their finances. 

“Withdrawal charges spiralled in the last tax year and now stand at an eye watering £34m – a more than threefold increase. This is money earmarked for home purchases and retirement and the decision to access these savings and lose the government bonus will not have been taken lightly.

“The government’s decision to cut the withdrawal charge from 25% to 20% for a year may be one factor behind the huge surge. Previously the 25% charge on withdrawals would have not only recouped the government’s bonus but taken a chunk out of the holder’s savings too – at a time when money is short this may be a cost too much to bear. It may also be the case that the financial pressures of the pandemic have forced people to take action regardless of the cost.”

The decision to cut the withdrawal charge was only active for a year – but the pandemic has dragged on for much longer than this. 

This tax year, any LISA holder will have to contend with a 25% charge on any withdrawals, leading Hargreaves Lansdown to predict another enormous increase in the amount recouped by HMRC for the 2021/22 tax year.

Morrissey added: “Life has its ups and downs and at times people need to dip into their savings to cover shortfalls in their income. We believe the 25% withdrawal charge is unfair and penalises savings. We would urge government to reassess its decision to reinstate the 25% withdrawal charge in favour of keeping it at 20%.”

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