The chancellor Jeremy Hunt is poised to cut the early access penalties on Lifetime Isas (Lisas) in the forthcoming budget, according to media reports.
PoliticoEU reported that the chancellor is considering cutting the early access penalty from 25 to 20 per cent on Lisa savings plans. This would effectively remove the government bonus paid on savings, but would not further penalise savers for dipping into these savings.
Lifetime Isas are open to those under 40, with contribution of up to £4,000 a year attracting a 25 per cent government bonus. These savings can be use to contribute towards a deposit on a first house purchase. However, penalties are applied for access for any other reason before the age of 60.
The current 25 per cent penalty means savers not only not lose the government bonus, but a portion of their contributions too.
There have been concerns that the cost of living crisis has forced some people to dip into their savings, and they have been unfairly penalised as a result.
In addition, Lisa terms stipulate that these plans only be used for a despot on a home valued at up to £450,000. This limit has not changed since these products were introduced in 2017. Given rampant house price inflation, particularly in the South East, this has resulted in some savers being potentially hit with this penalty when trying to use these savings to buy their first home property.
Martin Lewis, the founder of MoneySavingExpert has been campaigning for this change.
LCP partner and former pensions minister Steve Webb says: “If this is true, then [the Chancellor] is effectively abolishing the penalty for accessing your Lisa money.”
As he pointed out the bonus will turn a £80 contribution into £100, so the 20% penalty on withdrawals means saver get your original £80 back in full.
Hargreaves Lansdown head of retirement analysis Helen Morrissey says: “Reports that the Chancellor is considering cutting the Lisa early access penalty for first home buyers are welcome and if coupled with an increase in the £450,000 limit on the value of the first home to be bought would really boost people’s ability to get on the property ladder.”
But she adds that Lisa reforms have the potential to go much further.
“The reports do not mention if the penalty would be reduced for those saving for retirement. If it were it would be of enormous benefit to groups such as the self-employed. They aren’t covered by auto-enrolment and so don’t benefit from an employer contribution to a workplace pension. The shifting nature of their income means many would be hesitant to lock their money away in a pension until the age of 55. The 25 per cent bonus acts in a similar way to basic rate tax relief on a pension, with the added incentive that income taken is tax free.”
