In Focus: Tax  

Budget 2021: Lifetime Isa penalty reinstated

Budget 2021: Lifetime Isa penalty reinstated

Younger savers hoping for another reprieve on withdrawals from their Lifetime Isa have been left disappointed after the chancellor reinstated the 25 per cent penalty.

In 2020, Rishi Sunak reduced the 25 per cent Lisa penalty temporarily from March 6, 2020 until 11:59pm on April 5, 2021.

By means of a statutory instrument, the 25 per cent charge had been reduced to 20 per cent to help younger people in financial need as a result of the coronavirus crisis make withdrawals.

A withdrawal charge does not apply when a withdrawal is made to buy a first home or the investor has a terminal illness.

The temporary reduction meant Lisa investors would only lose the government bonus earned on the amount they withdraw, which is £1 on every £4 invested each tax year. 

However, although Sunak extended the furlough scheme until September this year, and announced further support for businesses, he did not extend the Lisa penalty reduction. 

Rachel Springall, finance expert at Moneyfacts.co.uk, said this would be a disappointment to younger people, especially as these are the worst hit in terms of job losses. 

She commented: “An unprecedented year has passed since the last Budget so it is clear to see why the chancellor has had a lot of factors to take into consideration for the latest changes impacting consumers of different financial products."

However, she added: "It’s disappointing that the penalty on Lifetime Isas will return to 25 per cent from the new tax year at a time where consumers may well still be struggling and need emergency access to funds.

"Any savers considering a Lisa would be wise to check the full terms and conditions before they enter any arrangement to ensure they are eligible for the 25 per cent government bonus."

Despite the lack of increases to the Isa thresholds and the reinstatement of the 25 per cent Lisa penalty, advisers have still urged investors to save as much as possible into tax-efficient investments.

Jason Hollands, managing director at Tilney, commented: "For now, it would be wise to make use of the various allowances available, while you can.

"Higher taxes are coming, but by stealth. Do consider shifting shares and investments into the tax-efficient embrace of Individual Savings Accounts – a process known as Bed and Isa - and contributing to pensions while the currently generous regime of reliefs for higher rate tax-payers remains in place."

This came as Skipton Building Society research among 2011 UK adults revealed 49 per cent of UK adults claimed they were feeling more risk-averse as a result of Covid-19, with more people determined to set aside more for their retirements.

Skipton has more than 159,000 cash Lisa customers and account balances of over £1bn.

simoney.kyriakou@ft.com