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Government must revisit LISA penalty as withdrawal charges more than triple

by maria
gawdo
  • A Freedom of Information request showed HMRC reclaimed £34m in Lifetime ISA (LISA) withdrawal charges in 2020/21 tax year – a more than threefold increase on the previous tax year.
  • This is despite government reducing the LISA withdrawal charge from 25% to 20% between 6 March 2020 and 5 April 2021.
  • The government reduced the charge to allow people to access their money during the pandemic and only lose the government bonus.
  • Hargreaves Lansdown launched a petition calling for the 20% charge to remain.
  • LISAs enable people to contribute up to £4,000 per tax year. In this case, the government will top it up by £1,000 bringing the LISA total to £5,000. If someone choses to make a withdrawal from their LISA for a purpose other than for retirement or to purchase a home, they would be hit with a 25% charge – in this case the charge on the £5,000 pot would be £1,250 – more than the government’s top-up.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“The pandemic wrought a huge financial toll on young people, and this can be shown in how they raided their LISAs to fill gaps in their finances.  Withdrawal charges spiralled in the last tax year and now stand at an eye watering £34m – a more than threefold increase. This is money earmarked for home purchases and retirement and the decision to access these savings and lose the government bonus will not have been taken lightly.

The government’s decision to cut the withdrawal charge from 25% to 20% for a year may be one factor behind the huge surge. Previously the 25% charge on withdrawals would have not only recouped the government’s bonus but taken a chunk out of the holder’s savings too – at a time when money is short this may be a cost too much to bear. It may also be the case that the financial pressures of the pandemic have forced people to take action regardless of the cost.

The decision to cut the withdrawal charge was only active for a year and the pandemic has of course dragged on for much longer than this. This tax year, any LISA holder will have to contend with a 25% charge on any withdrawals. We can expect to see another enormous increase in the amount recouped by HMRC for the 2021/22 tax year.

Life has its ups and downs and at times people need to dip into their savings to cover shortfalls in their income. We believe the 25% withdrawal charge is unfair and penalises savings. We would urge government to reassess its decision to reinstate the 25% withdrawal charge in favour of keeping it at 20%.”

The table below contains the amount reclaimed in withdrawal charges during previous tax years.

Tax year Total charge reclaimed by government Withdrawal charge
2018/19 £5,000,000 25%
2019/20 £10,000,000 25%
2020/21 £34,000,000 20%

Figures correct up to December 2021. Amounts rounded to the nearest £1m

About Lifetime ISAs

LISAs were introduced in 2017 with the aim of helping the under 40s save for retirement and get on the property ladder.

Holders can contribute up to £4,000 per year with the government adding a top-up bonus of 25% to any savings. So, someone contributing £4,000 in a tax year will get a £1,000 top up bonus. You can contribute to a LISA up to the age of 50. While you can’t contribute to your LISA after this point, it remains open and continues to accumulate interest/investment returns.

You can withdraw money from your LISA to purchase your first home or if you are aged 60 or over without incurring a charge. If you are terminally ill, you can also withdraw money from a LISA.

Withdrawing money for any other reason will attract a charge of 25%. So, if you wanted to withdraw £5,000 from your LISA you would be charged £1,250 to make that withdrawal.

In response to the pandemic government reduced the withdrawal charge to 20% between 6 March 2020 and 5 April 2021

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