As living costs continue to rise, savers are turning to their Lifetime ISAs (LISAs) for extra cash. The main problem? Withdrawal fees, which cost savers a staggering £34 million between 6 March 2020 and 5 April 2021, according to research by Hargreaves Lansdown.
But why are LISA withdrawal fees a problem? And should the government consider lowering the charges? Let’s take a look.
What is a LISA?
A LISA is a type of savings account. You can open one if you’re aged between 18 and 39. The goal of a LISA is to help you save towards your retirement or buying a first home.
- You can save up to £4,000 in a LISA every tax year.
- The government then tops up your investment with 25% of your savings that year. So, if you save £4,000, the government will add £1,000.
You’ll also earn interest on your savings. The best part? Since it’s a type of ISA, you won’t pay tax on the interest.
What is the LISA withdrawal fee?
The withdrawal fee applies when you take money out of a LISA for certain purposes.
To be clear, you won’t pay any fees if you withdraw savings from a LISA when:
- You’re over 60
- You have a terminal illness
- You’re under 60 but you’re using the money to buy a first property.
If you withdraw savings for any other reason, though, you’ll pay a withdrawal penalty of 25%.
When did the LISA penalty change?
Between 6 March 2020 and 5 April 2021, the UK government lowered the LISA withdrawal fee from 25% to 20%. The idea was to ensure younger people could access the vital funds they needed during the Covid-19 pandemic at a reduced cost. People would still be encouraged to save, knowing they could access their money when required.
However, as revealed by a Freedom of Information (FOI) request by Hargreaves Lansdown, HMRC still managed to reclaim £34 million in withdrawal fees for this period. This is more than triple what they reclaimed the previous year, which goes to show just how many people turned to their LISAs to help them through a challenging period.
The main issue? The government reinstated the 25% fee after 5 April 2021 – despite the ongoing pandemic and rising living costs. So, while young people may still need to rely on LISA savings, they’re now paying a higher charge to access the money.
Should the government revisit the LISA penalty?
The answer is yes, according to Hargreaves Lansdown. They’re actively campaigning for the government to permanently reduce the fee to 20%. Here’s why:
- A high penalty of 25% may discourage people from opening LISAs.
- At a time of ongoing economic uncertainty, it’s unfair to penalise savers by charging them high rates for withdrawals.
- Most people won’t use money set aside for retirement or buying a first home unless it’s an emergency. If savers need the cash, it’s a sign they may be struggling financially.
As it stands, it’s unclear whether the government will reconsider the LISA withdrawal penalty anytime soon. Hargreaves Lansdown launched a petition last year for the 20% charge to remain in place, but the government responded to say they would not make the 20% fee permanent.
However, there’s still a lot of pressure on the government to reconsider the charge, which means it’s an issue we could hear more about in the coming months.
Takeaway
Should the government permanently reduce the LISA withdrawal fee to 20%? Well, there’s no simple answer. On one hand, a LISA is just one type of financial product – there may be cheaper or more flexible options out there for savers. On the other hand, though, it’s a very challenging economic climate, and lower withdrawal penalties could help savers access their hard-earned money when required.
If you have savings in a LISA, before you withdraw any money, make sure you know how much the withdrawal will cost you, and consider whether there’s a cheaper way to solve your financial issue. And, if possible, try to avoid withdrawing LISA savings unless it’s for a first property or your retirement.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
Jennifer is a writer specialising in debt, personal banking, and small business finance.
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