TENS of thousands of savers have been fined a combined £75.2million for withdrawing their own money from a special bank account.
Fresh figures have revealed that, on average, Lifetime ISA (LISA) holders have been charged penalties of £755 each.
Finance experts said the figures highlight the need to reform the product[/caption]
The total value of LISA withdrawal charges hit £75.2 million in 2023-24 after 99,650 people made unauthorised withdrawals.
According to HMRC, this is nearly 40% higher than the previous year, when withdrawal penalties totalled £54.3 million.
The LISA was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.
It effectively replaced the former Help to Buy ISA.
The account is tax-free and anyone between 18 and 39 can open one.
You can save up to £4,000 a year and the government will then add a 25% bonus on top, effectively giving you free money.
But the only way you can make an authorised withdrawal from your LISA is if you are buying your first home, aged 60 or over or are terminally ill.
If you withdraw your savings for any other reason, you’ll pay a 25% “unauthorised withdrawal” penalty.
But this doesn’t mean you will just pay the 25% government bonus back.
This is because you have to pay it back on the total sum – including the government bonus.
So, if you had £2,000 saved and got the 25% bonus, taking you to £2,500, then took money out your account, you would then have to pay the 25% fee back on £2,500 – which is £625.
This means you’d lose £125 of your own money.
Some 56,900 people used their LISA to buy their first home in 2023-24, and under LISA rules the home must cost £450,000 or less.
However, LISA savers have to pay a 6.25% fine if they buy a home costing over £450,000 – a cap which has been frozen for seven years.
This is also classified as an “unauthorised withdrawal” penalty.
This has become more of a problem in recent years as house prices have risen sharply since the £450,000 limit was originally introduced.
According to the latest Land Registry data for March, the typical UK house price is £290,000.
Whereas in April 2017, when the LISA was launched, a typical home cost £220,094.
What is a Lifetime ISA?
FIRST-time buyers saving into a LISA can stash up to £4,000 into this account each year tax-free.
The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
For example, if you save £4,000, you’ll get a £1,000 bonus.
The amount you pay in is linked to your annual ISA allowance (£20,000 for 2023/24) – for example, if you pay £1,000 into your LISA, you can still pay £19,000 into other ISA products.
Any bonus you earn doesn’t count towards your ISA allowance.
You can open a Lifetime ISA with any bank, building society or investment manager that offers the product.
You can only open a LISA if you’re aged 18–39.
You can hold multiple Lifetime ISAs, although you can only pay into one each tax year.
You can also transfer your Lifetime ISA to another provider, for example, to get a better interest rate.
If you want to use a Lifetime ISA to buy a home, there are a few restrictions you need to keep in mind:
- Only first-time buyers can use Lifetime ISAs to buy a home, which means you can’t own, or have owned, a home in the UK or anywhere in the world.
- You’ll need to be buying a home for no more than £450,000.
- You must be buying a home you plan to live in – the scheme isn’t for buying a home you want to rent out, or a holiday home.
If you don’t use it to buy your first home, you can continue paying into a LISA until you’re 50.
You can then make full or partial withdrawal from your LISA, without paying a fee, when you turn 60.
What needs to change?
Some finance experts have called on the government to look into reducing the withdrawal penalty.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The Lifetime ISA is proving hugely useful with almost 57,000 people using one to help them get that all-important first step on the housing ladder in 2023/24.
“However, there’s massive room for improvement as around 100,000 people made an unauthorised withdrawal from their LISA during the same period and got clobbered with a withdrawal penalty.”
“Reducing the exit penalty from 25% to 20% would ensure that only the effect of the government bonus is removed rather than your own money and encourage more people to use a LISA for retirement safe in the knowledge that they won’t lose any of their own money should they need to access it early in a time of need.”
Other experts have encouraged the government to assess raising the first-home price cap of £450,000.
Stuart Cheetham, chief executive at MPowered Mortgages previously told The Sun: “LISAs were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.
“The cap on the value of a property they can be used for means LISAs are increasingly unfit for purpose.”
He pointed out that the average home in London already costs £500,000, and the return of rising prices increases the likelihood of LISA savers outside the capital falling foul of the £450,000 limit.
What other LISA pitfalls are there?
There are some other caveats to having a Lifetime ISA.
Among the biggest is the huge 25% penalty – which many have campaigned to have reduced.
The LISA allowance has remained frozen at £4,000 since the product was first launched in 2017, which is restrictive.
So, savers trying to build up a deposit and save more than the maximum LISA allowance of £4,000 may also want to consider a regular ISA.
You can only use a LISA for a property if you have never owned one.
This includes a share of inherited property or a home overseas.
If you’re a first-time buyer purchasing with someone else, like a partner or friend, for example, they cannot have owned a property before.
If you’re using the money for a new home, it is paid directly to a solicitor, not to you, which could be a nuisance.
If you reached the age of 40 on or before April 6, 2018 you won’t be eligible for a LISA
If you’re using the money for retirement, you can only access it on your 60th birthday. By contrast, you can access money in a private pension from the age of 55
Another thing to consider is that due to the age restrictions on when you can take a LISA out and when you can contribute to it – you’re limited on how much you can put in over the lifetime of the account.
This is particularly important to note if you’re expecting to reach your peak earning potential in your 50s – such as when you reach a higher level in your career.
It means that you could be earning the most you’ve ever earned and you won’t be able to put it into your LISA.
First-Time Buyer Tips
IF you’re looking to take your first step onto the property ladder, why not sign up to our new first-time buyer newsletter.
Buying your first home can be scary and confusing, but our five-part series will cover everything you need to know.
From ways to boost your chances of getting a top-rate mortgage to preparing for your move, The Sun’s new first-time buyer newsletter has got you covered.
