UK tax collector HM Revenue and Customs (HMRC) has so far charged young people more than £9m ($11.7m, €10.5m) in penalties for taking money out of a lifetime individual savings account (Isa), according to a freedom of information request by Royal London.
The data covers the whole of 2018/19 and the first seven months of 2019/20.
The Lifetime ISA started in April 2017 and allows those aged under 40 to deposit up to £4,000 per year towards a house deposit or pension.
The government adds a top-up of 25% of the amount deposited. But those who then need to access the money in their Lifetime Isa for any reason other than a house deposit face a double penalty.
Not only do they have to hand back the government top-up, but they also face an additional penalty charge on any withdrawals.
Charges
The first withdrawal charges were levied in 2018/19 and a total of £4.35m was paid over to HMRC in that year.
But the pace of charges has increased with a further £4.69m paid in just the first seven months of 2019/20.
In total, people under 40 who have changed their minds about putting money in a Lifetime Isa have had to hand back over £9m so far.
Jon Greer, head of retirement policy at Quilter, said to International Adviser: “Young people need to have clarity over how they should be saving for later life and retirement and the Lifetime Isa simply muddies the water and confuses people.
“The exit charge that the Lifetime Isa carries is ultimately trying to drive the right behaviours but in fact serves to damage the Isa ‘brand.’
“With a Tory majority now in place it would sensible for Sajid Javid to review the Isa regime with the aim of simplifying it.
“Too much choice can lead to inertia or making the wrong decision which as we can see by these figures can be financially damaging.”
Simple savings vehicle
Keith Richards, chief executive of the Personal Finance Society, said to IA: “Isas are supposed to be a simple savings vehicle, but it’s fair to say that the Lifetime Isa is far from straight forward and post retirement freedoms it is also nowhere near as beneficial as putting cash into a tax efficient pension pot.
“Unlike an Isa, with a Lifetime Isa, there is a sting in the tail as you need to use the proceeds to buy your first home or take your savings after the age 60 to keep your bonus otherwise there is a 5% exit penalty and charges, as well as a loss of growth on the added bonuses.
“Sadly, the number of savers being hit with a penalty charge they did not expect will only put more consumers off putting cash aside for a rainy day and compound what is already the lowest savings ratio since records began via the Office for National Statistics.”
Abolish penalty charge
Steve Webb, director of Policy at Royal London said: “These figures are a stark reminder that things can change.
“People who change their plans after saving in a Lifetime Isa are finding that not only do they have to pay back the government top-up but they face a penalty charge as well.
“This leaves them with less money than they started with. It is hard to see why the government should fine people whose only ‘crime’ was to put money aside in the hope of buying a home and then see their circumstances change.
“The Lifetime Isa would be a much attractive product if this penalty charge was abolished.”
