Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says the company is calling for LISA reform as penalties incurred by its customers surged 17% in 2022.
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.
LISAs were introduced to help people either save for retirement or help them onto the housing ladder. You can contribute up to £4,000 per year and receive a 25% bonus from the government – giving your savings a significant boost.
However, the fly in the ointment is that if you access your LISA for any other reason than retirement or first home purchase you incur a 25% penalty.
This is also the case if the home you purchase with a LISA is worth more than £450,000. This is a value that hasn’t been revised since LISAs were introduced in 2017 and given how house prices have skyrocketed during this period there will be people in areas such as London who will be hard pressed to find a property for less than that amount.
The added challenge here is that the penalty not only removes the bonus but means you forfeit some of your hard-earned savings as well.
As an example, someone saving £4,000 into their LISA would receive a 25% top up to £5,000. However, if they needed to access that money the 25% penalty would add up to 25% of £5,000 so they lose £1,250.
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.
