BUDGET 2021: Govt criticised for silence on Lifetime ISA penalty

A lack of attention given to the Lifetime ISA penalty in Rishi Sunak’s Budget has been criticised by personal finance experts.

The Budget made no mention of the Lifetime ISA penalty, which reverts to 25% in April.

The Lifetime ISA was introduced with a 25% penalty for those accessing their money before the age of 60, for any reason other than a first home purchase.

The government cut the penalty to 20%, from 6 March 2020 to 5 April 2021, to allow people affected by the pandemic to access their money early with only the loss of the government bonus. This was partly because Universal Credit means testing includes money in Lifetime ISAs, so people with no other support were expected to withdraw savings from their LISA.

An online petition started by Hargreaves Lansdown calling for a permanent reduction in the Lifetime ISA penalty has attracted over 17,500 signatures.

“The government’s decision not to extend the reduction to the Lifetime ISA withdrawal penalty is bizarre and hugely disappointing,” commented Hargreaves Lansdown senior analyst, Nathan Long.

“The risk of people having to unexpectedly access their savings is as high now as it was when they first introduced the reduction back when the pandemic was kicking off.

“There’s a real risk that people who have worked hard to do the right thing and save for their first home or for retirement through the Lifetime ISA will be punished for their efforts if their circumstances change.”

AJ Bell senior analyst, Tom Selby, added: “It is hugely disappointing the Chancellor didn’t use his Budget statement to, at the very least, keep the Lifetime ISA early withdrawal charge at 20%.

“The logic for reducing the withdrawal charge from 25% to 20% was the fact Lifetime ISA holders may face income pressure as a result of the lockdown.

“Given millions of people will continue to face employment uncertainty in the coming months – and particularly when the furlough scheme is finally scaled back – that logic remains at least as relevant for 2021/22 as it is for 2020/21.

“If you are under age 60, have money saved in a LISA and are planning to access it for anything other than a first home purchase in the near future, you should consider doing so before the withdrawal charge increases back to 25% from 6 April 2021.”

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