Younger savers withdrew around £165million from Lifetime Isas during the pandemic and repaid the Government some £33million in bonuses, new figures reveal.
Withdrawal charges were cut to 20 per cent from 25 per cent for a year in order to avoid penalising people who urgently needed cash if they lost jobs or fell on hard times during the crisis.
Financial firm Quilter, which obtained the charges data via a freedom of information request to HMRC, says: ‘These stark figures illustrate how many people needed to raid their savings to cope with the financial strain brought on them by the pandemic.’
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The old 25 per cent charge was reinstated in April, so 18 to 60-year-olds face a levy again – rather than simply having to repay the Government top-up on their savings – if they want the money in their Lifetime Isa for any purpose besides buying a home or retirement.
Lifetime Isas allow under-40s to save for a home and retirement at once, and the Government offers free bonuses worth up to £32,000 if you max out your fund during your younger to middle-aged years.
>>>Should you open a Lifetime Isa? Find out how they work here
But they have come in for criticism from financial experts amid fears younger savers will make poor decisions, for example by missing out on free employer contributions into a pension if they opt to use a Lifetime Isa to save for old age instead.
The 25 per cent withdrawal levy, which is meant to deter people from using them for anything other than the two savings goals they were set up to meet, has been controversial too.
A petition calling for it to be permanently reduced to 20 per cent attacted more than 20,000 signatures.
Quilter found that early withdrawal charges were much lower at £5million in 2018-19 and £10million in 2019-20, meaning they more than tripled during the pandemic, and that a total of £48million was clawed back from holders for taking out their money across three years.
Meanwhile, the firm says that the most recently available Government statistics show that when Lifetime Isas were introduced in 2017/18, £486million was subscribed to them, followed by £604million in 2018/19.
Number crunching: Charges levied on savers who made early withdrawals from Lifetime Isas for purposes other than a first home or retirement at 60 (Source: FOI request to HMRC from Quilter)
Rachael Griffin, financial planning expert at the firm, says: ‘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 Lifetime Isa withdrawal charge penalises savers who simply can’t predict their financial future.’
Griffin says that while the product strives for the best of both worlds as a hybrid between a retirement savings vehicle and an Isa for first time homebuyers, it falls short on both counts.
It lacks the flexibility of allowing savers to withdraw money at any time, or the benefits of pensions where generous tax relief and free employer contributions are offset by the requirement to lock up your money until at least age 55.
‘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,’ says Griffin.
Laith Khalaf, a financial analyst at AJ Bell, says: ‘Lifetime Isas are still relatively new and growing quickly, so we expect withdrawal charges to be on an upwards trajectory as the market gets bigger, and there will always be people whose need for the cash outweighs the hit of the penalty.
‘The pandemic clearly forced more people into that situation and the reduction of the withdrawal penalty to 20 per cent gave them the option to take their money back, without giving up any more than the Government bonus they had been handed in the first place.
‘The popularity of Lifetime Isas so far shows that it’s a worthwhile product for consumers to have in their toolkit, whether they’re saving for a house purchase, or for retirement.
‘However, we would like to see the withdrawal fee set to 20 per cent permanently, so savers aren’t penalised if their financial circumstances change and they find themselves in need of the money.’
A Treasury spokesperson says: ‘The Lifetime Isa is designed to encourage and support individuals to save for a first home or for later life, and the 25 per cent withdrawal charge is intended to protect its status as a long-term savings product.
‘However, to help people who needed access to their money early due to the pandemic, the withdrawal charge was temporarily reduced.’
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