The Government’s Savings Bill received Royal Assent this week, confirming the Lifetime ISA (LISA) will launch in April 2017.
A survey of AJ Bell Youinvest customers* reveals almost half (45%) that are eligible to take out a LISA plan to do so.
The majority of these people (60%) intend to use it for retirement rather than for a deposit on their first house.
However, worryingly almost a third (29%) were not aware of the 25% exit penalty they would incur if they need the money before age 60 for any reason other than house purchase or terminal illness.
As the rules currently stand, the exit penalty will be applied as a 25% Government charge applied to the full amount of withdrawal.
This structure means that the Government is contributing 20% of the initial investment but then charging an exit fee of 25% on the entire fund, including all investment growth.
Over a 20 year period of maximum contributions this would result in the exit penalty being almost double the Government bonus received (see table below).
Tom Selby, senior analyst at AJ Bell, comments: “The Lifetime ISA could prove a valuable and hugely popular addition to the UK’s savings infrastructure. Anything that encourages more people to save for their futures should be welcomed.
“However, the Government’s insistence on levying a 25% exit penalty on early withdrawals from 2018 risks costing people thousands of pounds and creates unwelcome complexity which could easily be avoided.
“The two major risks around the LISA are people quitting their workplace pension and missing out on valuable employer contributions, and investing without being fully aware of the implications of the exit penalty.
“It is not too late for the Government to remove one of these risks by reducing the exit charge to 20% of the withdrawal value, thereby just reclaiming the Government bonus. This would make the proposition much simpler and fairer for consumers.”
Personal contribution | Govt bonus | Fund value** | Potential exit penalty | Exit penalty as % of Government bonus | |
5 years | £20,000 | £5,000 | £28,164.88 | £7,041.22 | 141% |
10 years | £40,000 | £10,000 | £62,431.76 | £15,607.94 | 156% |
15 years | £60,000 | £15,000 | £104,122.66 | £26,030.66 | 174% |
20 years | £80,000 | £20,000 | £154,846.01 | £38,711.50 | 194% |
*AJ Bell surveyed over 400 customers between the age of 18 and 40
**Assumes a 4% annual return post charges