Young people saving into a Lifetime ISA have been hit with huge tax penalties for withdrawing their money, according to figures obtained from HM Revenue & Customs by Royal London.
A Freedom of Information request by Royal London revealed HM Revenue & Customs has charged young people more than £9 million since the introduction of Lifetime ISAs in 2017.
The first withdrawal charges were levied in 2018/19 and a total of £4.35 million was paid to HM Revenue & Customs in that year. But the pace of charges has increased with a further £4.69m paid in the first seven months of 2019/20 alone.
The Lifetime ISA allows those aged under 40 to deposit up to £4,000 per year towards a house deposit or pension, with the promise of a 25% top up by the government. However, savers who need to access the money in their LISA for a reason other than a house deposit face a penalty charge. They must hand back the government top up and pay an additional charge on any withdrawals.
Royal London’s calculations show that if someone put aside £80, the government would top it up to £100. However, if they decided to withdraw their money, they would be expected to pay back the additional £20 and a further £5 penalty. This means their original investment would decrease from £80 to £75.
Steve Webb, director of policy, Royal London, has called for the penalty charge to be scrapped.
He said: “A Lifetime ISA can be attractive for those who are clear about their plans to put down a deposit on a house and who are confident that they won’t need the money for any other reason. But these figures are a stark reminder that things can change.
“It is hard to see why the government should fine people whose only ‘crime’ was to put money aside in the hope of buying a home and then see their circumstances change. The LISA would be a much attractive product if this penalty charge was abolished.”
