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Lifetime Isa architect calls for exit penalty to be scrapped

One 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contributions, the 25 per cent charge on pre-60 withdrawals is actually greater because it applies to the total to be withdrawn.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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