Ahead of Chancellor of the Exchequer Jeremy Hunt’s Budget on Wednesday (15th March), Hargreaves Lansdown has called for changes to Lifetime ISA (LISAs) to reflect the current property market.
The penalty when LISA funds are accessed for a purpose other than either retirement or to purchase a first home is currently 25%, but Hargreaves Lansdown called for this to be permanently dropped to 20%.
The number of penalties incurred by Hargreaves Lansdown customers rose by 17% in 2022 to 5,898, though the total value of penalties fell to just over £4.6m, down from £5.1m in 2021.
This equated to £793 per penalty in 2022, compared with over £1,000 in 2021.
Almost 5,900 of the firm’s customers accessed their LISA during 2022 in order to cope with the cost-of-living crisis.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It is unfair that people who are trying to do the right thing by building savings are being penalised this way, particularly now when difficult circumstances mean many people may need to access their savings to meet day-to-day living costs.”
LISAs allow savers to contribute up to £4,000 per year for either retirement or their first home purchase, receiving a 25% bonus from Government in addition to their savings.
The penalty also applies when the home purchased using LISA savings is worth more than £450,000.
Morrissey said: “This is a value that hasn’t been revised since LISAs were introduced in 2017, and given how house prices have skyrocketed during this period, there will be people in areas such as London who will be hard pressed to find a property for less than that amount.
“The added challenge here is that that the penalty not only removes the bonus, but means you forfeit some of your hard-earned savings as well.
“As an example, someone saving £4,000 into their LISA would receive a 25% top up to £5,000. However, if they needed to access that money the 25% penalty would add up to 25% of £5,000 so they lose £1,250.
“The penalty was temporarily reduced to 20% during the pandemic, but has since been restored. We believe it should be reduced on a permanent basis.
“People are trying to do the right thing and build up their financial resilience and they shouldn’t be penalised for having to access them during tough times.”
Morrissey added: “The £450,000 cap on the value of a first home to be bought with a LISA has not changed since the product was introduced in 2017.
“However, property prices have soared since then up £75,687, just over a third, and it’s fair to say someone living in London would struggle to find a first home for less than this amount.
“If the home bought exceeds this amount you get hit with a 25% penalty charge. We would like to see the cap increased in line with house price growth.”
