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Lifetime Isa architect calls for exit penalty to be scrapped

Pensions-savings-retirement-piggy bankOne of the key thought leaders behind the Lifetime Isa has called on the government to reduce the charge imposed on early withdrawals so it does not act as a “penalty”.

In his latest paper, Michael Johnson, a research fellow at the Centre for Policy Studies, also argues that the product should not carry an age restriction, and auto-enrolment payments should be eligible for payment into the Lifetime Isa.

Johnson notes that while there is a 25 per cent government bonus on contributions, the 25 per cent charge on pre-60 withdrawals is actually greater because it applies to the total to be withdrawn.

Effectively, this is a 6.25 per cent “penalty”, which is “not intuitive, adds complexity and serves no consumer purpose”, according to Johnson.

Johnson says: “It should be eliminated, by simply reducing the withdrawal charge from 25 per cent to 20 per cent.

“Penalty-free access to savings would encourage more people to save more, and would be cost neutral to the Treasury.”

Johnson argues that the starting age of 18 should still apply to getting the bonus, but contributions should be allowed from birth as long as they are not accessed until age 18.

He adds: “We could go further: a Lifetime Isa could be automatically established when a baby’s name is registered, with a provider
nominated by the parents, as the personal saving equivalent of workplace auto enrolment.”

Making employee contributions under auto enrolment eligible for Lisa payment “would help engender a sense of personal ownership of savings derived from the workplace, as well as provide improved access.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Quite right, 20% otherwise it is a ‘dead duck’.

  2. The basic premise of the (somewhat mis-named) LifeTime ISA is that the government-sponsored bonuses they attract are intended to help savers build a deposit for their first house purchase or, failing that, to act as a personal retirement fund. On what basis does this bloke Johnson expect the government to scrap all exit charges for those who want to cash out early whilst at the same time allowing them to retain the tax benefits? That ain’t the deal.

  3. Surely the 25% exit penalty was a mistake by some mathematically illiterate civil servant. It’s just crazy. Its just unfair to take back more than the government has put in.

  4. I don’t think he wants to scrap all exit charges, just the excess penalty’ charge. I believe that Govt. is trying to find a way to remove itself from pension tax relief for HRT / ART payers.

    • You may be right, but reports indicate that take-up of the LifeTime ISA, as a retirement savings vehicle, has been pretty muted. In fact, the very word pension has become so poisonous to many people that any mention of saving for retirement is likely to elicit the question: Wot, d’you mean a pension plan? Don’t want one of those.

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