A recent Telegraph report confirms that the man behind the Lifetime ISA (LISA) thinks early withdrawal charges should be lowered to tackle the rising cost of living.
Withdrawals outside of LISA rules are currently subject to a 25% fee. During 2021/22 alone, a record 77,500 LISA charges were paid, at a cost to savers of more than £33 million.
During the Covid pandemic, in March 2020, the charge was temporarily dropped to 20% to help furloughed workers. Now, Michael Johnson, who first came up with the lifetime savings product, thinks the charge should be lowered again.
Even if the charge was lowered, though, would the short-term benefit of extra funds outweigh the long-term potential losses?
Keep reading to find out.
LISAs are tax-efficient but huge charges can apply
Introduced 6 April 2017, the LISA, in its current guise, allows anyone aged 18 to 39 to save for a first home. To incentivise saving, your contributions are eligible for a 25% bonus each year.
You can contribute a maximum of £4,000 in a single tax year, so you could receive a free £1,000 top-up from the government.
The bonus is added each year you contribute, up to the age of 50. If you took out a LISA aged 18 and paid in the full LISA allowance each year, your government bonuses would total £33,000 by the time you were 50.
So far, so good.
However, charges can apply if the money is not used in certain ways.
The LISA is intended to be used as help toward buying a first home. If you withdraw it for any other use before you reach age 60, the government bonuses you received are recouped through a 25% charge. If you wait until age 60 before withdrawing funds, no charge applies.
In practice, the 25% charge is harsher than it sounds. The government bonus is added as a percentage of your contribution, but the withdrawal charge is on the full amount.
If you have £12,500 saved in a cash-only LISA, for example, that will comprise £10,000, plus the 25% bonus of £2,500. The exit fee of 25%, though, is on the full £12,500 and equals £3,125.
From your initial £10,000 contribution, you receive just £9,375 back.
The cost of living crisis will be a real worry for many this winter
Over the last few months, rising inflation has created a series of 40-year highs, culminating in July. The 10.1% figure marked the first time inflation had hit double-figures since 1982.
The latest report from the Office for National Statistics (ONS) confirms a small drop for the 12 months to August, to 9.9%.
The 0.2% drop is said to be a result of falling petrol prices, but the longer-term outlook is still worrying. The Bank of England (BoE) expects inflation to peak above 11% later this year and not return to the BoE’s 2% target until 2024.
There are also rising energy bills to consider. Liz Truss’s latest announcement has frozen the cap at £2,500 for two years. This cap, though, is twice the amount it reached in October 2021.
If household budgeting is tight this winter, you won’t be alone. You may need to cut back on non-essentials and carefully monitor your energy use. At Globe IFA, we can help you manage your cash flow so get in touch if you are worried about what rising living costs could mean for you in the short and medium term.
You’ll need to weigh the cost of living against why you took out a LISA in the first place
If you’ve taken out a LISA – or encouraged loved ones to take one out – it was likely because you wanted to put the money towards a first home. Alternatively, you might be waiting until age 60 to withdraw it, at which point no charge applies.
It’s worth noting that a LISA is an individual savings account. As a couple, two LISAs can be opened, so two sets of bonuses can be received.
Losing these bonuses, and the money you had earmarked for your first home, could be a bad idea in the long term. You run the risk of taking out less than you put in while losing the chance to get on the property ladder at a time when house prices are rising.
You’ll also need to think about the type of LISA you have. You can hold cash, stocks and shares, or a combination of both so consider the potential for lost investment growth too.
Get in touch
The cost of living crisis is a worry for many but paying your future self remains key. It might seem like a good idea in the present to neglect or withdraw savings and investments that are intended to make you financially stable in the future, but this is rarely the case.
If you or a loved one needs help budgeting as living costs rise, then contact us now. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
