This is the argument being put forward by investment platform, Hargreaves Lansdown, which has launched a petition calling on the government to reinstate the lower penalty put in place during the height of the Covid crisis.
The Lifetime ISA (LISA) is a savings account used by first-time buyers to build up their deposit. It allows savers to deposit up to £4,000 each year with the government paying a 25% bonus on the savings.
As such anyone paying the maximum into the account will receive £1,000 a year on top of their savings.
If a withdrawal is made from the account before it is used to purchase a home the account holder must pay a 25% charge.
Between 6 March 2020 and 5 April 2021 the government reduced the LISA withdrawal charge from 25% to 20% to allow people to access their money and only lose the government bonus.
After this time it returned to 25% despite the fact many people were still continuing to struggle financially as a result of the pandemic.
Hargreaves Lansdown explained how increasing the penalty meant savers were not only losing the government bonus but also additional savings.
Indeed, if someone who had saved the full £4,000 and received an additional £1,000 bonus withdrew their cash, the penalty, under the 25% system, would be £1,250.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, explained: “The pandemic wrought a huge financial toll on young people, and this can be shown in how they raided their LISAs to fill gaps in their finances.
“Withdrawal charges spiralled in the last tax year and now stand at an eye watering £34m – a more than threefold increase. This is money earmarked for home purchases and retirement and the decision to access these savings and lose the government bonus will not have been taken lightly.”
She added: “The decision to cut the withdrawal charge was only active for a year and the pandemic has of course dragged on for much longer than this. This tax year, any LISA holder will have to contend with a 25% charge on any withdrawals. We can expect to see another enormous increase in the amount recouped by HMRC for the 2021/22 tax year.
“Life has its ups and downs and at times people need to dip into their savings to cover shortfalls in their income.
“We believe the 25% withdrawal charge is unfair and penalises savings. We would urge government to reassess its decision to reinstate the 25% withdrawal charge in favour of keeping it at 20%.”
