Victory! The Treasury will now allow aspiring first-time buyers to tap into their Lifetime Isas without penalty – just days after we raised concerns
- On Tuesday, we reported young savers would be penalised
- The DWP expects people to use Lifetime Isa cash before they can get benefits
- But the Treasury did not adjust the 25% withdrawal penalty
- This costs young savers their own money as well as a government bonus
- The Treasury has now changed tack and dropped the penalty to 20% for a year
Treasury minister John Glen said the Lifetime Isa penalty would be reduced to 20%
The Treasury announced today that first-time buyers who run into financial difficulty would no longer be charged their own money to raid their future house deposits.
In a major victory for This is Money – we raised the issue with the Treasury on Monday – economic secretary John Glen said those who needed the money would no longer be charged a 25 per cent withdrawal penalty until next April.
Instead the fee would be dropped to 20 per cent, meaning savers would have to pay back the Government top-up of up to £1,000 a year but would not be charged on their own savings.
A saver who had the annual allowance of £4,000 saved in their Lifetime Isa would have been charged £250 of their own money if they needed to make a withdrawal at short notice.
But despite the Government saying people should not be using their Lifetime Isa as an easy-access savings account, the fact people were expected to raid those savings before they could get Universal Credit meant it was effectively classed as one, albeit one with a punitive withdrawal charge.
The Treasury refused to comment on the issue when This is Money raised it on Monday but has changed tack just days after we published the story.
Treasury minister John Glen said: ‘The Treasury will legislate for a temporary reduction in the Lifetime Isa withdrawal charge to 20 per cent between 6 March 2020 and 5 April 2021.
‘This will mean account holders will only have to pay back any government bonus they have received but will not pay the additional withdrawal charge of 5 per cent.
‘The rule change will be backdated to 6 March, so anyone who has withdrawn their money early since that date and paid a 25 per cent charge will have the difference refunded.’
Campaigners including former pensions minister Steve Webb had previously called on the Government to review the issue ‘as a matter of urgency’, while Lifetime Isa providers including AJ Bell, Hargreaves Lansdown and Moneybox have long called for the penalty to be reduced to 20 per cent.
We raised the issue of the Lifetime Isa penalty and the fact savings are factored into Universal Credit calculations on Monday. The Treasury didn’t respond to us, but has now changed tack
Webb told This is Money: ‘The Lifetime Isa was designed exclusively to help younger people do one of two things – save for the deposit on a first home or save for retirement. It was never supposed to be a way of saving for day-to-day living expenses.
‘By including Lifetime Isa savings in the means test for Universal Credit, the government is saying to young people on a low income or out of work that they have to raid money locked up for long-term savings in order to meet day-to-day bills, and to face a withdrawal penalty if they do so.’
A Freedom of Information request by insurer Royal London found savers had been charged more than £9million in Lifetime Isa withdrawal penalties since the product was launched three years’ ago.
The Lifetime Isa can be opened by those aged between 18 and 40 and offers a government bonus of 25 per cent of the amount saved up to £1,000 a year.
Cash and stocks and shares versions are available.
Money withdrawn for any other reason than to buy a first home or for retirement after the age of 60 is subject to a 25 per cent penalty.
But fortunately those who are forced to turn to their house deposit or retirement if they find themselves in financial difficulty due to the coronavirus will now no longer be charged their own money to do so, at least for now.