The total value of Lifetime ISA withdrawal charges jumped almost 40% in the 2023/24 tax year as people accessed their savings in a bid to make ends meet.
The latest LISA figures from HM Revenue & Customs showed that penalty charges reached £75.2 million in the 2023/24 tax year, a significant increase on the £54.3 million seen in the previous year.
It comes as almost 100,000 people accessed their savings during the year.
Rachael Griffin, tax and financial planning expert at Quilter, said: “These concerning figures illustrate just how many people continue to face a difficult battle over the need to save for the future versus the need to pay their bills and higher costs have clearly won as so many have had to stomach the 25% charge to gain access to their money.
“In what remains a financially challenging time for many, we should not be overly penalising people for using their hard-earned savings. Yet, the punitive 25% penalty means that those who have done the right thing by saving are penalised if they need to access their cash.”
The figures also showed that LISAs are growing in popularity, with 56,900 people using one to help them get on to the housing ladder, an increase of around 1,150 on the previous tax year. However, experts warned that while the 25% government top up on savings of up to £4,000 per year is a “huge incentive” to help people save, the corresponding 25% exit penalty will also act as a deterrent.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, called upon the government to reduce the charge to 20%.
“Reducing the exit penalty would ensure that only the effect of the government bonus is removed rather than your own money and encourage more people to use a LISA for retirement safe in the knowledge that they won’t lose any of their own money should they need to access it early in a time of need.”
Morrissey said allowing people to open and contribute to a LISA up until the age of 55, rather than the current 18-39 age limit, would also help open the product up to more people and be particularly helpful for self-employed people.
Brian Byrnes, head of personal finance at Moneybox, also called for greater flexibility.
He said: “Our data shows that the LISA is more popular than ever, with a 32% year on year increase in the number of new customers opening a LISA in the first half of 2024. With such strong demand for the LISA, we believe that now is the time to future proof this incentivised savings product to ensure it continues to provide such invaluable support to young people.
“Moneybox is actively calling on the government to review the price cap regularly to enable the product to keep pace with property price growth. We are also proposing a more flexible approach to the withdrawal penalty currently imposed to support people who are working hard to invest in their futures.”
