03 July 2023
The number of people making unauthorised withdrawals from a Lifetime ISA (LISA) rose by 56% to 74,650 in the 2022/23 tax year, up from 47,850 in 2021/22. This amounted to a huge £47.2 million hit to savers in the form of unauthorised withdrawal charges as more people ripped cash out of their savings to help make ends meet.
The unauthorised withdrawal charge currently sits at 25%, which not only removes the government’s bonus but eats into people’s own savings too. This charge was reduced to 20% during the pandemic to reflect the challenging financial situations many found themselves in, yet despite the cost-of-living crisis, savers have not been given the same grace.
As of 31 July, the Financial Conduct Authority’s Consumer Duty will come into force, which includes the anticipatory concept of ‘foreseeable harm’, meaning firms must take all reasonable steps to avoid causing foreseeable harm to their customers.
The sale of Lifetime ISA products will be brought into question, as the increase in penalties shows some customers find it difficult to predict a future squeeze on spending which means they subsequently need to withdraw their funds for a reason other than to buy a first home or to fund retirement.
The 25% unauthorised withdrawal charge takes not only the government’s bonus but also eats into savings, meaning savers could be worse off than they started. Intermediated sales where a customer has sought advice before paying into a Lifetime ISA will have ensured that the amount being paid is only as much as the individual can afford to have locked away even if times get tough, but direct sales where customers are not supported through this decision-making process could result in more customers needing to claw back their savings if they have overcommitted.
The 25% LISA government bonus is very generous and therefore acts as a strong incentive for prospective first-time buyers in particular who are desperate to take their first step onto the property ladder. It therefore means they can easily overcommit themselves have they not received professional financial advice and are not properly aware of the risks, particularly where top ups can be made in a matter of seconds with little to no reference to the rules surrounding the product.
As such, Quilter is calling for the government to reduce its unauthorised withdrawal charge to 20% - in line with its previous commitment during the pandemic – and to require enhanced warnings of the risks around the government withdrawal charge for non-advised sales. These warnings should not only be clear at the time of a Lifetime ISA being set up, but also as an alert each time a customer makes a top-up payment to ensure they are well informed and can make a better judgement as to whether they can afford to lock their money away for the long term.
Rachael Griffin, tax and financial planning expert at Quilter, says:
“The Lifetime ISA provides a generous government bonus for people who are looking to save for their first home or later life, but the huge rise in the number of people making unauthorised withdrawals suggests that many people may have overcommitted when saving and are being penalised for needing to access the money to help make ends meet.
“As we have seen in the past few years, it is impossible to accurately predict what might happen to the economy, let alone the policy changes the government might make such as those seen at the infamous ‘mini budget’ last year, and this can make financial planning all the more complex. Those who seek professional financial advice benefit from the expertise and knowledge of a financial planner who can help them assess what would happen to their finances in various scenarios and can therefore make informed decisions. In comparison, someone going it alone would have a much harder time trying to navigate where best to save their money and how much they can commit.
“A Lifetime ISA is described as an ISA, yet it comes with a punitive pension-like unauthorised payment charge. For those who are able to afford to leave their money in the LISA the penalty is not an issue, but in light of the cost-of-living crisis, a considerable number of people are having to dip into these savings and face losing their hard-earned money as a result. What’s more, LISAs were first launched in a very different economic environment, and young people are now finding it much more difficult to get onto the property ladder. Even with a substantial deposit, high house prices and rising interest rates are making it unaffordable for many and at a time when money is tight, it is more likely that people will need to access the funds they have locked away.
“People should be encouraged to save for their futures, but only as much as is appropriate for them and in the right savings vehicles. The generous government LISA bonus is enough to draw people into the Lifetime ISA, but the foreseeable harm of the high penalty charge punishes people for trying to make the most of it.
“While there should of course be limited friction when it comes to customer interactions with their finances, in this instance the positive friction of a reminder when a customer tops up their LISA that the money is locked in and there is a penalty should they need to withdraw it would be a good way to ensure people go in with their eyes wide open. Coupled with a reduction of the unauthorised withdrawal charge, savers could feel much more confident that they are making an informed decision.”
