Savers ‘raided Lifetime Isa savings to fill gaps in their finances’
Savers raided pots intended for their first home or their retirement as the coronavirus pandemic squeezed finances last year.
Some £34 million in Lifetime Isa withdrawal charges were recorded in the 2020/21 tax year – more than three times the £10 million total the year before.
The figures were highlighted by Hargreaves Lansdown which made a freedom of information (FOI) request to HM Revenue and Customs (HMRC).
The sharp increase was recorded despite withdrawal charges being temporarily reduced between March 6 2020 and April 5 2021.
Lifetime Isas, also known as Lisas, come with a 25% Government bonus.
Withdrawal charges spiralled in the last tax year and now stand at an eye watering £34 million
Helen Morrissey, Hargreaves Lansdown
They were set up specifically for people saving for their first home or their retirement. Savers withdrawing money for any other reason would normally face hefty withdrawal charges.
The temporary reduction in withdrawal charges meant that savers were able to generally get back all the money they originally put in, subject to any investment losses incurred by those with Lifetime Isas invested in stocks and shares.
Hargreaves Lansdown is calling for the temporary reduction in the withdrawal charge to be kept.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “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 £34 million.
She added: “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.”
Ms Morrissey continued: “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%.”
