Proactive Investors - Hargreaves Lansdown (LON:HRGV) has called on a permanent reduction in the lifetime ISA (LISA) withdrawal penalty ahead of Wednesday’s budget.
Currently, a 25% penalty is incurred when money is withdrawn from a LISA for any reason other than to purchase a first home or retire.
That penalty fee is applied not only to current savings but also to the government bonus.
For example, a LISA holder who has saved £4,000 would receive a 25% bonus, taking their total to £5,000.
If they needed to access £1,000 from a LISA, they would have to request a withdrawal of £1,250, with the difference being paid to the government as the penalty fee.
Hargreaves Lansdown believes the penalty should be reduced to 20% as it was during the pandemic on a permanent basis and that people trying to “build up their financial resilience” shouldn’t be “penalised for having to access them during rough times.”
According to Hargreaves Lansdown, LISA penalties incurred by its customers surged 17% last year to 5,898.
However, the total value of penalties fell to £4.6mln from £5.1mln in 2021, suggesting more people are withdrawing less money.
“The cost-of-living crisis continues to drain our finances and people face difficult decisions about their financial dreams and aspirations,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
“It looks like people are taking less from their LISAs with penalties down to £4.6m compared to £5.1m in 2021 but it is clear people are feeling the pressure and reform is sorely needed,” Morrissey added.
Chancellor Jeremy Hunt will be confirming details of his spring budget on Wednesday, with January’s surprise £5.4bn surplus giving the Treasury a bit of leeway in what can be offered to Hunt.
Hunt faces several dilemmas, including whether to offer a pay increase for public sector workers or subsidise motorists.