New data gathered by wealth manager, Quilter, shows that Lifetime ISA (LISA) early withdrawal charges have more than tripled in a year to GBP33 million in the 2020/21 tax year compared to GBP10 million in 2019/20.
A Freedom of Information request shows that over the previous three tax years, a total of GBP48 million has been levied against LISA holders for early withdrawals.
In 2018/19 and 2019/20 the withdrawal charges were set at 25 per cent before they were dropped to 20 per cent from 6 March 2020 to 5 April 2021 to help people impacted by the pandemic to access funds. However, the 25 per cent charge is now back in place.
The usual 25 per cent withdrawal penalty is to disincentivise people from using a LISA for a purpose other than buying a first home or for retirement. The temporary reduction of withdrawal charges to 20 per cent meant account holders would only have to pay back the 25 per cent government bonus they received, meaning effectively there is no exit fee.
Given there were withdrawal charges of GBP33 million in 2020/21 it implies that the total amount withdrawn from LISAs was around GBP165 million.
The most recent available government ISA statistics show that when LISAs were introduced in 2017/18 GBP486 million was subscribed to the product and GBP604 million in 2018/19.
Rachael Griffin, financial planning expert at Quilter, says: “These stark figures illustrate how many people needed to raid their savings to cope with the financial strain brought on them by the pandemic. Clearly, reducing the withdrawal charge to 20 per cent and thus ensuring savers weren’t unfairly penalised during this difficult time was sensible. However, these figures also reveal that the Lifetime ISA has some significant flaws in its design.
“The pandemic has shown the nation that financial strains can be just around the corner for almost everyone. The government should realise that while we are hopefully not going to experience another event like the Covid crisis, other personal and financial crises will still happen each day and the 25 per cent LISA withdrawal charge penalises savers who simply can’t predict their financial future.
“The products are meant to be a hybrid between a retirement savings vehicle and an ISA product for first time buyers. Unfortunately, while the product strives for the best of both worlds it falls short. Lifetime ISAs are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.
“They were a muddled idea to start with and the government should carefully consider their place in the long-term future of the UK’s savings system.”