Finance

Savers pay £1million in Lifetime Isa withdrawal penalties


More than 1,500 savers have had to pay an average of £695 to the taxman as punishment for withdrawing money from their Lifetime Isa, official figures have revealed.

A Freedom of Information request found that £1.05million in penalties had been paid by savers under 40 between the product’s launch in April 2017 and April this year, raising more concerns about a product frequently criticised as complex and gimmicky.

One expert said the figures were unsurprising, and called on the Treasury to simplify the Isa system.

More than 1,500 younger savers were penalised for trying to withdraw money from their Lifetime Isa against the rules. You can only use the cash to buy a house or save for a pension

More than 1,500 younger savers were penalised for trying to withdraw money from their Lifetime Isa against the rules. You can only use the cash to buy a house or save for a pension

Lifetime Isas were brought in two years ago by then-Chancellor George Osborne, and were designed to help people save for their first home or retirement.

 They can be opened by those under 40 and you can save up to £4,000 a year tax-free, with the Government adding a 25 per cent top-up bonus.

Savers can choose either a cash or stocks and shares investment Lifetime Isa and money saved and bonuses given can be withdrawn without penalty only to buy a first home, or after the age of 60.

Attempting to withdraw the money for any other reason will see you incur a 25 per cent penalty, which takes away the government bonus and more, meaning you could get back less than what you put in. 

You also have to wait 12 months between opening a Lifetime Isa and using it to buy a home, and the property cannot cost more than £450,000.

What’s more, when using a Lifetime Isa to buy a house holders of the account never actually touch the money themselves, it is paid through a third-party solicitor. 

This is perhaps one reason for savers’ confusion, as the process is different from its predecessor the Help to Buy Isa.

Those who save money into a Help to Buy Isa can make withdrawals without penalty as its Government bonus is paid on the closing balance, not instantly.

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In total, 1,510 of those who had opened a Lifetime Isa had paid a 25 per cent penalty for attempting to access their cash early. 166,000 Lifetime Isas were opened in the 2017-18 tax year, according to HMRC.

Commenting on the figures, The Savings Guru’s James Blower said: ‘Sadly this isn’t a surprise to hear.

‘What’s worrying about the stats is there was no penalty if savers withdrew from Lifetime Isas before the first government bonus was added at the end of the 2017-18 tax year, so these penalties have been incurred in just over a year.

‘To me, this clearly demonstrates that Lifetime Isas are not clearly understood and are being used for the wrong purposes by savers.’

He said a major problem with the Lifetime Isa was that it married together the purposes of buying a house and saving for retirement.

‘These are completely different and the same vehicle shouldn’t be used for both purposes.’

Blower concluded that the 25 per cent penalty was not the issue, but ‘the fact they are too complex and being used for the wrong purposes by some savers. 

I’d urge the Treasury to review Isas entirely and bring back simplicity, as soon as possible 

James Blower, The Savings Guru 

‘I’d urge the Treasury to review Isas entirely and bring back simplicity, as soon as possible.’

Lifetime Isa providers are required by the Financial Conduct Authority to inform savers about exit charges.

Ben Stanway, the co-founder of Moneybox, which offers both a cash and stocks and shares Lifetime Isa, called on the Government to cut the penalty. 

He said: ‘We think the government should cut the early withdrawal penalty from 25 per cent to 20 per cent so people would only lose their bonus. 

‘From speaking with customers ahead of the launch of our own Cash Lifetime ISA, we know young people have a good understanding of the rules, but things happen in their lives that they couldn’t have predicted. 

‘They might want to withdraw their money because they have met someone who already owns a home, chosen to invest in their education or decided to move to another country. 

‘These are normal life events that people are penalised for under the current rules.’

Skipton Building Society, the first provider to offer a cash Lifetime Isa, said fewer than 3 per cent of its account holders made early withdrawals, with 40 per cent of those having a balance of less than £1,000.

It said: ‘As the biggest Lifetime Isa provider, Skipton has over £880million in Lifetime ISA balances, and has paid £179million in bonuses to young savers. We are firmly of the view that this account is a much needed shot in the arm for young people aspiring to own their own home or save for their future. 

‘While we have no control over the Government’s rules for this account, we make sure anyone opening a Skipton Lifetime Isa is fully aware of the Government penalty for early closure.’

HMRC said: ‘The Lifetime Isa was introduced to help younger generations save both for their first home and later life.

‘It was devised as a long-term savings product which supports people to save flexibly by providing a generous 25 per cent Government bonus on contributions up to £4,000 a year. 

‘To incentivise savers to use the Lifetime ISA in this way there is a 25 per cent Government charge on unauthorised withdrawals.

‘This maintains the flexibility of the product, as people are able to access the vast majority of their savings and growth in need, while also ensuring it is used for its intended purpose.’

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