Hard-up savers who need to raid their Lifetime Isa pot will soon be charged their own money to do so again to ‘discourage withdrawals’ and ‘protect its status as a long-term savings product’, the Government has said.
It said the penalty for withdrawing money from the tax-free account would be increased back up to 25 per cent from 6 April and that it had ‘no plans to permanently reduce this charge to 20 per cent.’
Budget documents appeared to suggest the Treasury planned to reinstate the higher penalty, which would cost savers their own money plus a Government bonus of up to £1,000 a year, from 6 April, after dropping it for a year.
The product can be either used by a first-time buyer for a home, or to be used as a pot to build retirement savings no to be touched until the saver reaches 60.
A petition to permanently reduce the Lifetime Isa penalty to 20% – meaning savers would only lose a Government bonus – has received more than 19,000 signatures
Someone who saved the maximum £4,000 a year into a Lifetime Isa and needed to withdraw it would be billed £250 of their own money on top of the £1,000 bonus, an effective penalty of 6.25 per cent of their own savings.
But despite a petition calling for the penalty to be permanently reduced attracting more than 19,000 signatures, the Government said the higher charge would be reintroduced.
In a response to the petition, published the day after the Budget and just under a fortnight after the petition hit 10,000 signatures, it said: ‘This charge is made to reflect that the account is intended to be used for the specific purposes of home ownership and later life and therefore disincentivise withdrawals.
‘Savings remain accessible where needed, subject to this additional charge.
Need to tap your savings? Don’t wait until deadline day
Savers who need to withdraw Lifetime Isa deposits before the penalty is bumped back up to 25 per cent need to act quickly to avoid being charged.
According to conversations with Lifetime Isa providers, the taxman has confirmed the reduced 20 per cent penalty applies to withdrawals paid out before the 5 April deadline, not withdrawals requested before that date.
This means savers who need to sell off investments need to give themselves time before those transactions clear, or for cash withdrawals to be paid out.
While savers should not touch their Lifetime Isa savings unless they have to, if they do they should be aware that they will be charged their own money if they leave it too late.
‘The Government believes it is fair that this significant investment of public funds is targeted at individuals who save into a Lifetime Isa for its intended purpose.
‘It is right to protect its status as a long-term savings product, discourage withdrawals that might be made in the absence of an additional charge and provide value for money for the taxpayer.’
However, although the Government insists the account is designed for long-term saving, savers are expected to raid those savings if they fall on hard times before they can get benefits.
The Treasury initially dropped the penalty for a year after This is Money reported how Lifetime Isa savings were included in the means test for Universal Credit.
It particularly affects those who are saving into a Lifetime Isa for retirement, as pension savings are not included in the Universal Credit means test, which says those with more than £16,000 in savings have to use those before they can apply.
But while other measures aimed at supporting household finances, including the furlough and self-employed income support scheme and the £20-a-week uplift in Universal Credit, have been extended until September, despite fears that unemployment could peak towards the end of this year.
‘The argument for a temporary extension is really strong’, Nathan Long, an analyst at DIY investment platform Hargreaves Lansdown, which launched the petition, said.
‘Given the nation seems to be steeling itself for anticipated job losses as furlough unwinds, the case for the reduced penalty must surely be as strong now as when they first signed off on it.’
Lifetime Isa savers have to pay their own money to access their deposits before they are eligible for benefits
Those calling for the reduction to be made permanent also said the severity of the penalty acted as disincentive to save into it in the first place.
Ben Stanway, the co-founder of Moneybox, now the UK’s largest Lifetime Isa provider with more than 250,000 holders, said: ‘While we appreciate the importance of encouraging long-term saving, our strong view is that the loss of a 25 per cent bonus is sufficient incentive for people to avoid dipping into their savings unless they need to. There is no need for any further disincentive.’
He added: ‘The majority of Lifetime Isa savers are in their 20s, and life can change a lot in that period, people want to go back into education, some people get married to someone who owns a home already.
‘At the moment people are penalised for understandable life events.’
He said if the Government did not reduce the penalty permanently, it ‘could expand the list of allowable withdrawals’, which at the moment covers only a first home purchase, withdrawals made once the holder turns 60 or in cases of terminal illness.
‘It would be a great signal to young savers and show we unequivocally support you.’
Nathan Long added: ‘The response centres on the need to disincentivise withdrawals, but this fails to recognise that Lifetime Isa savers are paying in voluntarily.
‘They don’t need to be locked into doing the right thing and save for the future as they’ve already decided to do it.
‘Giving up the government bonus is disincentive enough, meaning the additional penalty just acts as a barrier to save in the first place.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.