Lifetime charges are skyrocketing, according to an ISA warning, and reforms are needed.
Lifetime ISAs (LISAs), which can provide bonuses for retirement and have been hailed as the most tax-efficient choice for retirement planning, can help increase retirement preparations. However, new evidence shows that LISA withdrawal fees increased during the pandemic, prompting criticism of the financial instrument as unfit for purpose.
Lifetime ISA contributions can be used to augment pension plans, as they provide government bonuses for both home purchases and retirement savings. LISA holders, on the other hand, will face a penalty if they make withdrawals that aren’t used for either of these goals, according to new research.
According to new statistics acquired by Quilter, the wealth manager, LISA early withdrawal charges have more than tripled in a year, from £10 million in 2019/20 to £33 million in 2020/21.
Quilter cited a Freedom of Information request that revealed a total of £48 million in penalties had been assessed against LISA holders for early withdrawals over the preceding three tax years.
Withdrawal charges were set at 25% in 2018/19 and 2019/20 before being reduced to 20% from March 6, 2020 to April 5, 2021 to allow persons affected by the epidemic access funds.
The previous 25% charge, however, has been reinstated.
The penalty is in place to discourage people from using a LISA for anything other than buying their first house or saving for retirement.
However, in an effort to assist savers, the government temporarily decreased the charges to 20%, implying that account holders would only have to repay the 25% bonus they earned, effectively eliminating the exit fee.
Quilter argued that with £33 million in withdrawal charges in 2020/21, the total amount removed from LISAs was roughly £165 million.
When LISAs were introduced in 2017/18, £486 million was subscribed to the product, which climbed to £604 million in 2018/19, according to the most recent available Government ISA statistics.
Quilter’s Rachel Griffin, a financial planning specialist, weighed in on the findings.
“These sobering figures demonstrate how many people had to drain their funds to cope with the financial pressure imposed on by the pandemic,” Ms Griffin said.
“Clearly, lowering the withdrawal tax to 20% and ensuring that savers were not unfairly penalized at this tough time was a wise decision.
“These data, on the other hand.”Brinkwire Summary News”.