The penalty for withdrawing from a LISA is 25%, which can see the individual lose not just the tax uplift from saving into the tax wrapper, but also some of their capital. This could be seen as foreseeable harm.
Quilter has called on the Government to cut the Lifetime ISA unauthorised withdrawal charge after savers got hit with £47.2 million in penalty charges last year.
The wealth manager believes the charge should be reduced from its current 25% to 20% to reflect the current cost-of-living crisis.
The number of people making unauthorised withdrawals from a LISA jumped by 56% to 74,650 in the 2022/23 tax year, up from 47,850 in 2021/22, resulting in £47.2 million in charges.
Quilter said the introduction of the Consumer Duty on 31st July will bring into question the sale of LISA products, with the increase in penalties suggesting that customers are finding it difficult to predict a future squeeze on spending. It warned that the 25% unauthorised withdrawal charge not only takes the government’s bonus but eats into savings, meaning savers could be worse off than they started.
LISAs were first launched in 2017 to help people save for their first home or for retirement. Customers receive a government bonus worth 25% of what they pay in, up to a set limit, every year. Quilter said the “generous” bonus acts as a strong incentive for prospective first time buyers but could mean they “easily overcommit” themselves and are not properly aware of the risks.
Quilter says in addition to reducing the charge to 20% – in line with the government’s previous commitment during the pandemic – there should also be enhanced warnings of the risks around the withdrawal charge for non-advised sales. These warnings should be clear at the time of setting up a LISA, as well as each time a customer makes a top-up payment to ensure they are well informed and can make a better judgement as to whether they can afford to lock their money away for the long term.
Rachael Griffin, tax and financial planning expert at Quilter, said: “As we have seen in the past few years, it is impossible to accurately predict what might happen to the economy, let alone the policy changes the government might make such as those seen at the infamous ‘mini budget’ last year, and this can make financial planning all the more complex.
“Those who seek professional financial advice benefit from the expertise and knowledge of a financial planner who can help them assess what would happen to their finances in various scenarios and can therefore make informed decisions. In comparison, someone going it alone would have a much harder time trying to navigate where best to save their money and how much they can commit.
“A Lifetime ISA is described as an ISA, yet it comes with a punitive pension-like unauthorised payment charge. For those who are able to afford to leave their money in the LISA the penalty is not an issue, but in light of the cost-of-living crisis, a considerable number of people are having to dip into these savings and face losing their hard-earned money as a result.”
Griffin pointed out that LISAs were introduced in a very different economic environment and young people are finding it harder to get on to the property ladder today, making it more likely that they will need to access the funds they have locked away.
Griffin added: “People should be encouraged to save for their futures, but only as much as is appropriate for them and in the right savings vehicles. The generous government LISA bonus is enough to draw people into the Lifetime ISA, but the foreseeable harm of the high penalty charge punishes people for trying to make the most of it.
“While there should of course be limited friction when it comes to customer interactions with their finances, in this instance the positive friction of a reminder when a customer tops up their LISA that the money is locked in and there is a penalty should they need to withdraw it would be a good way to ensure people go in with their eyes wide open. Coupled with a reduction of the unauthorised withdrawal charge, savers could feel much more confident that they are making an informed decision.”
