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Encouraging LISA take up would benefit from scrapping of ‘harsh’ exit penalty

19 June 2019

The number of Lifetime ISA accounts being opened has reached nearly 300,000 since the wrapper launched in April 2017, which may see new providers enter the market, suggests AJ Bell. To boost take-up, the company is calling on government to scrap the “unnecessarily harsh” exit penalty.

According to a Freedom of Information request by the company, 286,000 accounts have been opened over the past two years. Based on average subscriptions of £3,114 in 2017/18, the pension provider said this equates to investments worth over £1.4 billion, and when 25% government bonuses are taken into account, now likely tops £1.8 billion.

Tom Selby, senior analyst, AJ Bell, said: “When you combine the amount invested with the government bonuses added, we reckon almost £2 billion has now been invested through LISAs, providing a rocket boost for first-time buyers and a useful top-up to traditional pension savings too.”

However, AJ Bell has called for the government to scrap its 25% exit penalty for early withdrawals which it dubbed “unnecessarily harsh”.

Selby continued: “The Lifetime ISA has been that rare thing in financial services: a useful, popular new product. Despite the restrictions in place on those who invest and the relatively low number of providers who have come to market to date, almost 300,000 accounts have been opened. With the Help to Buy ISA due to be abolished in November it is likely the big banks and building societies will enter the fray.

“While the LISA now has a firm foundation in the UK savings landscape, the 25% Government-imposed exit penalty for early withdrawals is unnecessarily harsh and could leave investors with less than they originally contributed.

Reducing this charge to 20% of the amount withdrawn – in effect returning the Government bonus – would be fairer and make explaining LISA’s benefits more straightforward.”

AJ Bell said the current age restrictions, which bar anyone aged 40 or over from investing in a LISA, should also be revised as part of the government’s drive to solve the self-employed savings crisis. With around 5 million people now working for themselves, the majority of whom have little to no retirement savings, abolishing age restrictions in addition to lowering the exit charge would give the LISA a boost for future investors, according to the firm.

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