Chancellor urged to cut Lifetime ISA exit penalty as two-fifths say it's a barrier to accessing savings

AJ Bell press comment – 14 November 2022

• One in seven Lifetime ISA savers has considered accessing their money during the cost-of-living crisis
• Two-fifths say the exit penalty is a barrier to them taking Lifetime ISA cash
• Another 14% said that they weren’t aware that the exit penalty exists
• Government should cut the exit charge from 25% to 20%

Laura Suter, head of personal finance at AJ Bell, comments:

“One in seven people* with a Lifetime ISA has thought about accessing their money during the cost-of-living crisis, as costs keep rising and incomes fail to keep up. Younger people are less financially resilient and so more likely to need to access their savings to help with the cost-of-living crunch. However, anyone taking ad-hoc money out of their Lifetime ISA faces losing some of their savings thanks to the punitive government 25% exit penalty.

“Two-fifths of people have said the exit penalty is a barrier to them taking their money out of the Lifetime ISA, and this rises to two-thirds of those people who have considered making a withdrawal during the current cost-of-living crisis.

“A potentially bigger problem is those people who access the cash in their Lifetime ISA without realising they will be hit with the exit charge, as 14% said that they weren’t even aware that the penalty exists. Many people will be dipping into their Lifetime ISA only to discover afterwards that they have handed over some of their own savings to the government, rather than just losing the bonus money.

“During the pandemic the government reduced the withdrawal charge from 25% down to 20%, to allow people to access their savings penalty-free if they found their finances squeezed during the crisis. Disappointingly this was restored to 25%, rather than changed permanently.

“It feels impossible that the government doesn’t view the current cost-of-living crisis in the same way. Reducing the exit fee would be a low-cost move for the government that would help first-time buyers who saved into their Lifetime ISA in good faith but due to soaring inflation now need to dip into their savings.

“The latest figures show that show that the government pocketed £33m of savers’ money in the 2021/22 tax year, thanks to early withdrawal charges, from a record 77,500 Lifetime ISA savers. The average unauthorised withdrawal over the year was £1,706, meaning the average withdrawal charge was £426.50.

“What’s more, the number of individuals making unauthorised withdrawals increased throughout the tax year, from 3,750 in May 2021 up to 8,900 people in April 2022, making £3.6m of unauthorised withdrawals in that single month alone. These figures will surely climb as the cost-of-living crisis has worsened and people are faced with no option but to withdraw their savings, despite the penalty.”

How the exit penalty works:

Where money is taken out of a Lifetime ISA for a first home purchase, where the person is terminally ill, or from the age of 60 onwards there will be no charge to pay. However, withdrawals in all other circumstances will be hit with a 25% exit penalty.

For example, if some paid in £4,000 in a year and got the £1,000 government bonus, and then withdrew the entire £5,000 they’d pay an exit fee of £1,250 – losing £250 of their own money on top of the whole government bonus.

*Based on research for AJ Bell by FindOutNow of 1,065 people carried out online on 10^th November 2022.