Lifetime Isa early withdrawal charges have more than tripled in a year to reach £33m, official data has shown.
A Freedom of Information Request, submitted by Quilter, found early withdrawal charges for the Lifetime Isa (Lisa) hit £33m in the 2020-21 tax year, compared with £10m in 2019-20.
Over the previous three years, a total of £48m has been charged against Lisa holders for taking their money out early.
In 2018-19 and 2019-20 early withdrawal charges were set at 25 per cent before they were dropped to 20 per cent from March 2020 to April 2021 to allow people impacted by the Covid pandemic to access their funds.
Rachael Griffin, financial planning expert at Quilter, said the figures showed how many people had to raid their savings in order to cope with financial strain brought on by the pandemic.
Griffin said: “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.”
In the Budget in March chancellor Rishi Sunak reinstated the 25 per cent charge.
This penalty is in place to disincentive people from using a Lisa for any other means than buying a first house or saving for retirement.
A withdrawal charge does not apply when a withdrawal is made to buy a first home or the investor has a terminal illness.
According to Quilter the £33m withdrawal charge implied that the total amount withdrawn from Lisas was around £165m.
The most recently available government Isa statistics show that when Lisas were introduced in 2017-18 £486m was subscribed to the product and £604m in 2018/19.
Lisa exit charges:
25 per cent
25 per cent
20 per cent
Griffin said the Lisa falls short as it does not let people withdraw money flexibly like other Isas but also does not come with the generous tax relief that pensions offer.
Griffin added: “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.”
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