Unauthorised Lifetime Isa withdrawal penalties reach £47.2m

Government fines imposed on depositors for ‘unauthorised’ withdrawals from Lifetime Isas amounted to £47.2m in the last financial year, figures from HM Revenue & Customs show.

Savers can only withdraw cash from a Lisa when buying a first home if they turn 60 or are terminally ill and have less than 12 months to live.

A government-imposed surcharge of 25 percent applies to all recordings outside of this.

Some 27,000 more people were forced to withdraw money from their Lisas to make ends meet compared to last year, figures from HMRC show.

The figure is up by 53 per cent, or nearly £17 million, compared to £30.8 million in the 2021 to 2022 tax year, and by more than £13 million compared to 2020 to 2021, when the pandemic saw people struggling to cope above water during lockdowns.

High inflation and a rising cost of living have people scrambling to put money away for tax savings, but HMRC’s data highlights the need for Lisa savers to exercise caution when considering withdrawals.

Rachael Griffin, tax and financial planning expert at Quilter, said: ‘These disturbing numbers illustrate how many people are fighting a tough battle over the need to save for the future versus the need to pay their bills.

“Rising costs have clearly won out as so many have had to swallow the 25 percent fee to access their money.”

In total, the value of Lisas’ redemptions rose from £123 million to £189 million during the period. The total number of people who made unauthorized withdrawals from their Lisa was about 75,000.

While Lifetime ISAs are generally considered tax-advantaged when saving for a first home, unauthorized withdrawals result in heavy financial penalties.

During the pandemic, a reduced withdrawal rate of 20 percent was temporarily introduced from March 6, 2020 to April 5, 2021.

However, this no longer applies and the 25 percent levy is currently in effect.

As an example – if someone has built up £15,000 in a Lisa: £12,000 of money they put in, plus interest, and £3,000 added by the government.

A 25 per cent fine on £15,000 equates to £3,750, meaning they lose £750 more than the £3,000 added by the 25 per cent government top-up.

For first-time buyers to use their Lisa to buy a home, the property must not be worth more than £450,000, and this figure has remained unchanged since 2017 despite rising house prices.

About 56,000 people used a Lisa last year to buy their first home. according to HMRC

Griffin said: “In this time of financial hardship, we shouldn’t overly penalize people for using their hard-earned savings, but the 25 percent fine not only takes away the government bonus, but also eats into people’s own savings.

The numbers reiterate the desperate need for reform of the Lisa.

‘The Lisa tries to solve two opposing problems; saving for a home and saving for retirement, and fails to do both adequately, even if the name misfires one of its main goals.

“Plus, they’re treated like an Isa on a universal credit income test, but they carry an early withdrawal like a pension — it’s the worst of both worlds.”

She added: “To simplify the current offer and make it fairer for savers who have no choice but to dip into their savings, the rules should at least be changed to take away just the bonus rather than the plunder people’s savings.

“This could easily be achieved by reducing the penalty from 25 percent to 20 percent, essentially freeing the product from an exit fee that is levied on people’s actual savings and could encourage more people to save.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the latest HMRC figures are made for ‘sobering reading’.