Early withdrawal charges imposed on lifetime Isas have more than tripled over the past year, as investors accessed their savings in response to the pandemic.
Under a freedom of information request wealth manager Quilter found that withdrawal charges stood at £33m in the 2020/21 tax year, compared to £10m in 2019/20.
Over the previous three tax years, a total of £48m has been levied against Lisa holders for early withdrawals.
Quilter says that these latest figures suggest that around £165m was withdrawn from Lisas over the past year.
The most recent available government Isa statistics show that when Lisas were introduced in 2017/18 £486m was subscribed to the product and £604m in 2018/19.
In 2018/19 and 2019/20 the withdrawal charges were set at 25 per cent before they were dropped to 20 per cent from 6 March 2020 to 5 April 2021 to help people impacted by the pandemic to access funds. However, the 25 per cent charge is now back in place.
The usual 25 per cent withdrawal penalty is to disincentivise people from using a Lisa for a purpose other than buying a first home or for retirement. Lisas offers a 25 per cent government bonus on contributions, up a maximum of £4,000 a year.
Quilter financial planning expert Rachael Griffin says: “These stark figures illustrate how many people needed to raid their savings to cope with the financial strain brought on them by the pandemic. Clearly, reducing the withdrawal charge to 20 per cent and thus ensuring savers weren’t unfairly penalised during this difficult time was sensible.
However, these figures also reveal that the Lifetime Isa has some significant flaws in its design.
“The pandemic has shown the nation that financial strains can be just around the corner for almost everyone. The government should realise that while we are hopefully not going to experience another event like the Covid crisis, other personal and financial crises will still happen each day and the 25 per cent LISA withdrawal charge penalises savers who simply can’t predict their financial future.
“The products are meant to be a hybrid between a retirement savings vehicle and an Isa product for first time buyers. Unfortunately, while the product strives for the best of both worlds it falls short.
“They were a muddled idea to start with and the government should carefully consider their place in the long-term future of the UK’s savings system.”
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