Younger savers face strict penalties for withdrawing money from their Lifetime Isas.
Lifetime Isa savers have been charged £9m in penalties for accessing their money by HM Revenue and Customs (HMRC) since the start of 2018, a freedom of information request from Royal London has found.
The first withdrawal charges were levied in 2018/19 and a total of £4.35m was paid to HMRC in that year. These charges increased in the following year and HMRC received £4.69m in charges over the first seven months of 2019/20.
In total people who have changed their mind about the lifetime Isa have had to pay over £9m in penalty charges to HMRC so far.
The Lifetime Isa was introduced in April 2017 and allows those under 40 to deposit up to £4,000 a year towards a deposit or pension. The government then adds a top-up of 25% to the amount deposited.
Savers wishing to access their money for a reason other than a house deposit or before retirement will lose the government bonus and face a 25% penalty charge.
For example, if a you deposited £800 into a Lifetime Isa, the government will pay a 25% bonus of £200, giving you an overall pot of £1,000.
If you have an emergency and need to withdraw the entire pot a 25% penalty charge will apply to the full £1,000 - a total of £250.
This will leave you with £750, which is £50 less than you started with.
Should you open a Lifetime Isa?
The Lifetime Isa is now the only government-backed savings product on the market designed to help people save for a mortgage deposit, after the withdrawal of the Help to Buy Isa.
While it offers savers the chance receive a government top-up, the withdrawal penalty charges can seriously damage people's savings efforts should their circumstances change.
Steve Webb, director of policy at Royal London, says: “A Lifetime Isa can be attractive for those who are clear about their plans to put down a deposit on a house and who are confident that they won’t need the money for any other reason.
"But these figures are a stark reminder that things can change."
The number of Lifetime Isas on the market has been sluggish since launching in 2017. There are currently only 14 providers, offering either cash or stocks and shares options.
Revising the penalty fees could help make the Lifetime Isa a more appealing to savers while encouraging more providers to introduce their own, according to Webb.
"The Lifetime Isa would be a much more attractive product if this penalty charge was abolished," he says.
"It is hard to see why the government should fine people whose only ‘crime’ was to put money aside in the hope of buying a home and then see their circumstances change."
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