"This is a sensible move to ensure that Lifetime ISA savers aren’t unfairly penalised if they need to withdraw money from a Lifetime ISA during this pandemic."
The reduced withdrawal charge applies to all unauthorised withdrawals until Monday 5 April 2021.
This means that
LISA providers who have deducted a 25% withdrawal charge since the 6 March will be able to correct the withdrawal charge made by claiming back one fifth of the original withdrawal charge from HLISA investors will only lose the government bonus earned on the amount they withdraw and will get back all the money they originally put in.MRC. The corrected amount claimed will be credited back into the investor’s LISA.
The government recently came under fire for factoring Lifetime ISA savings into Universal Credit eligibility calculations, penalising those who are saving up to buy their first home.
Claimants are only eligible for Universal Credit if they have savings below £16,000 and Lifetime ISAs are included in this limit, despite being designed for long term saving.
Industry experts have raised concerns that savers are being encouraged to use their Lifetime ISA savings before claiming Universal Credit, despite facing a 25% penalty for withdrawing funds.
Many are now calling for the Government to remove Lifetime ISAs from the Universal Credit savings limit.
Economic Secretary to the Treasury, John Glen, said: "We know that some people are experiencing financial difficulties during these unprecedented times and we want to make it as easy as possible for people to access their savings, especially if it helps them avoid falling into high cost or unmanageable debt.
"That’s why we are reducing the withdrawal charge for Lifetime ISAs, so people can access their funds to help get them back on their feet. This is part of the wide range of support we have put in place to help people who have been affected by Coronavirus with their finances."
Rachael Griffin, financial planning expert at Quilter, commented: “This is a sensible move to ensure that Lifetime ISA savers aren’t unfairly penalised if they need to withdraw money from a Lifetime ISA during this pandemic. Many people are experiencing loss of earnings that is no fault of their own, so we’re pleased that they will be able to use their Lifetime Isa savings if they need them without facing an unfair early withdrawal penalty.
“However, this does expose the flawed design of the Lifetime ISA. They were originally set-up as a halfway house between a retirement savings vehicle and an ISA product for first-time buyers. It was an unusual experiment in blending pensions and young people’s savings into a single vehicle from the then-Chancellor George Osborne, who was keen to explore alternatives to the traditional pension system. In the end that experiment has produced a botched job and now his successors are cleaning up the mess left behind.
“Lifetime ISAa are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.
“That has led to a situation where they have a penalty for early withdrawal similar to a pension. But crucially, they are treated like an ISA for a means test assessment for Universal Credit. This means that if you apply for Universal Credit, your pension is not included as a potential source of income if you’re under 55 and face a tax penalty to access it. But a Lifetime ISA is treated like an ISA and so does count against you, even though it carries a tax penalty.
“Lifetime ISAs were a muddled idea to begin with. While some people have found use for them, such as using it to fund a house deposit, or set money aside for later life if they’ve already hit their pension funding allowance limit, they create as many problems as they solve. Government should look at whether they serve a sensible purpose in the long-term future of the UK’s savings system.
“There are other ways of incentivising pension saving and providing financial help to first-time buyers without merging them together in a confusing hybrid product.”
