Nadhim Zahawi urged to cut ‘punitive’ 25% tax which sees savers lose out on free cash

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Martin Lewis advises savers on Lifetime ISA penalties

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The new Chancellor will have a multitude of issues to deal with as he starts his tenure, however, he has been encouraged to look at one particular form of saving. The Lifetime ISA (LISA) is designed to help Britons save towards the specific goal of either purchasing their first home, or saving for retirement. 

It is intended to encourage people to save for the future, as it offers a Government bonus to help people along.

When it comes to withdrawing money from the LISA, however, this can only be done for very specific reasons.

These are:

  • Buying one’s first home
  • At the age of 60 or over
  • If someone is terminally ill, with less than 12 months to live.

Individuals who withdraw cash or assets for any other reason will pay a withdrawal charge of a hefty 25 percent.

However, in one of his first acts as Chancellor, Mr Zahawi has been urged to consider whether this tax penalty is appropriate.

This is particularly give the rising cost of living which means people are more likely to dip into their savings to support themselves.

Laura Suter, head of personal finance at AJ Bell, explained: “With the cost of living soaring and wages failing to keep up, it’s inevitable that some will have to dip into their Lifetime ISA savings just to pay their bills and meet the rising cost of food, petrol and energy bills. 

“The latest figures show that a record 77,500 people were hit with more than £33million worth of early withdrawal charges in 2021/2022.

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“Many people were forced to dip into their savings to meet costs elsewhere.

 “The new Chancellor could reduce the exit fee to 20 percent, so it only recovers the Government bonus. 

“It will give people a bit of breathing room to dip into their savings and not face the punitive exit fee for doing so.”

There has already been a precedent set for reducing the withdrawal penalty for the Lifetime ISA.

The Government reduced the exit fee to 20 percent during the COVID-19 pandemic, as they recognised income challenges could mean withdrawals might be necessary.

Ms Suter has argued this shows it is “easy for the Government to implement a reduction”.

If the exit fee was reduced from 25 to 20 percent, it could have a tangible impact for savers.

Someone who withdrew £2,000 from their LISA would save £100 if the fee was dropped, the expert added. 

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Helen Morrissey, senior pensions analyst at Hargreaves Lansdown, also shared an appetite for the penalty to be slashed.

She said: “When it comes to LISAs, we want to see the withdrawal penalty cut to 20 percent.

“While it may look like you are just giving up the Government bonus it’s more complicated than that, because it takes a chunk of the money you have invested too (£6.25 of every £100). 

“People’s circumstances can change, and we don’t think it’s fair to penalise savers for trying to do the right thing.”

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