Govt cuts LISA exit charge to 20%

The Government has announced it will be cutting the Lifetime ISA (LISA) exit charge from 25% to 20% as part of its coronavirus response.

The rule change will be backdated to 6 March, so anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.

The Government said the move means savers will get back all the money they originally put in, subject to any investment losses incurred on stocks and shares LISAs.

The LISA – which offers a 25% bonus, paid monthly, on up to £4,000 of savings each year – is intended to help younger people save for their first home or for later life, according to the Government. As with many other long-term saving products, withdrawing funds early or for unintended purposes normally incurs a charge.

The Economic Secretary to the Treasury, John Glen, said: “We know that some people are experiencing financial difficulties during these unprecedented times and we want to make it as easy as possible for people to access their savings, especially if it helps them avoid falling into high cost or unmanageable debt.

“That’s why we are reducing the withdrawal charge for LISAs, so people can access their funds to help get them back on their feet. This is part of the wide range of support we have put in place to help people who have been affected by coronavirus with their finances.”

AJ Bell senior analyst, Tom Selby, commented: “This is a sensible and pragmatic move by the Treasury in unprecedented circumstances.

“The 25% LISA exit charge always seemed unfair as it meant savers who withdrew their fund early could end up getting back less than they originally put in. But during a global pandemic when many young people will be struggling to make ends meet, applying the exit penalty would have been particularly cruel.”

Quilter financial planning expert, Rachael Griffin, also welcomed the change, but suggested it did not “expose the flawed design of the LISA”.

“They were originally set up as a halfway house between a retirement savings vehicle and an ISA product for first-time buyers,” Griffin added.

“It was an unusual experiment in blending pensions and young people’s savings into a single vehicle from the then-Chancellor George Osborne, who was keen to explore alternatives to the traditional pension system. In the end that experiment has produced a botched job, and now his successors are cleaning up the mess left behind.
 
“LISAs are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.
 
“LISAs were a muddled idea to begin with. While some people have found use for them, such as using it to fund a house deposit, or set money aside for later life if they’ve already hit their pension funding allowance limit, they create as many problems as they solve. The Government should look at whether they serve a sensible purpose in the long-term future of the UK’s savings system.”

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