Thousands of aspiring first-time home buyers who run into financial trouble due to the coronavirus pandemic could have to pay the Government hundreds of pounds to access house deposits before they are eligible for benefits.
The Department for Work and Pensions says Lifetime Isa savings are included in the means test for Universal Credit, but withdrawals from the tax-free account are subject to a 25 per cent penalty unless they are used to buy a first home or after the holder turns 60.
Experts and campaigners including former pensions minister Steve Webb, now a partner at pension consultants Lane Clark and Peacock, called on the Government to review the charge ‘as a matter of urgency’.
The Department for Work and Pensions uses Lifetime Isa savings to determine eligibility for Universal Credit. This means those who have them are expected to use them before benefits, but they cannot access these savings without paying a penalty
He said: ‘By including Lifetime Isa savings in the means-test for Universal Credit, the Government is saying to young people on a low income or out of work that they have to raid money locked up for long-term savings in order to meet day-to-day bills, and to face a withdrawal penalty if they do so.’
Cash and stocks and shares versions of Lifetime Isas can be opened by anyone aged between 18 and 40, and savers can pay in up to £4,000 a year.
It is supposed to be used by first-time buyers or those saving for retirement and offers a 25 per cent government bonus of up to £1,000 a year.
However, withdrawals for any other reason are subject to a 25 per cent penalty, costing savers not only the bonus but some of their own money as well.
This is because the Government top-up adds 25 per cent to the basic savings, making the total sum 125 per cent of what someone has saved. But when the penalty is levied it is charged on the total sum, not what someone put in.
Someone who saved the maximum £4,000 would end up with £5,000 after the Government bonus. But if they withdrew that, they would be charged £1,250, which includes the bonus plus £250 of their own savings.
What is likely to be the average penalty?
Skipton Building Society, the first provider to launch a cash version, said the average balance of its 186,832 Lifetime Isa customers was £5,619.
If someone had to withdraw that money at short notice to support themselves if they had been furloughed or lost their job, they would be penalised £1,404.75, £280.95 of which would be their own savings.
HMRC’s own figures found in 2017-18 there were 166,000 Lifetime Isa savers, who held an average of £3,114.
Savers withdrawing that would be hit with a £778.50 charge, £155.70 of which would be their own money.
The Government says on its website that ‘if you treat your Lifetime Isa as a short-term savings product, you could get back less than you paid in.’
But by factoring Lifetime Isa savings into the means test for Universal Credit, the DWP and HMRC are effectively asking savers to treat them like that.
Former pensions minister Steve Webb said the Lifetime Isa withdrawal penalty ‘needs reviewing as a matter of urgency’
Those with £16,000 or more in savings are ineligible for Universal Credit, while those with between £6,000 and £16,000 receive fewer benefits.
Many of Britain’s biggest banks have already waived early exit fees for fixed-term savings accounts, meaning those struggling with their finances can access their savings without charge.
But the Lifetime Isa bonus is a matter for the Government.
Steve Webb said: ‘The Lifetime Isa was designed exclusively to help younger people do one of two things – save for the deposit on a first home or save for retirement.
‘It was never supposed to be a way of saving for day-to-day living expenses.
‘By including Lifetime Isa savings in the means test for Universal Credit, the government is saying to young people on a low income or out of work that they have to raid money locked up for long-term savings in order to meet day-to-day bills, and to face a withdrawal penalty if they do so.
‘This is inconsistent with how other long-term savings such as pensions are treated and needs reviewing as a matter of urgency.’
Iona Bain, founder of the Young Money Blog, said: ‘The outsized Lifetime Isa penalty was devised as backstop to discourage people drawing down their funds for the hell of it. It was not designed to punish people facing financial ruin.
The outsized Lifetime Isa penalty was devised as backstop to discourage people drawing down their funds for the hell of it. It was not designed to punish people facing financial ruin
Iona Bain – Young Money blog
‘Why is the Lisa suddenly being treated as an easy-access savings product when it has been sold by the Treasury as a long-term way to build funds for housing and retirement?
‘We would never dream of including a pension as an available fund to draw on a crisis for the purposes of claiming Universal Credit.
‘So why is the DWP saying it’s okay for young people to raid their Lifetime Isas?
‘What kind of lop-sided, irresponsible message does this send out? I’m afraid this is symptomatic of short-sighted, careless decision-making at the Treasury and DWP that fails to consider young people’s real lived experience.
‘Dropping the penalty to 20 per cent so it isn’t punitive is so obviously the right thing to do that if it doesn’t happen, you really have to wonder just how much the Treasury cares about getting young people back on their feet again when this is all over.’
DIY investment platform Hargreaves Lansdown offers a stocks and shares Lifetime Isa. Personal finance analyst Sarah Coles said ‘the penalty element of the government withdrawal charge is not justified’
Sarah Coles, of DIY investment platform Hargreaves Lansdown, which offers a stocks and shares Lifetime Isa, said: ‘If you lost your income and you have money in a Lifetime Isa, it is included in the means test, but it also means you have access to the money – subject to the charge – so if needs be, you could withdraw the money you needed to make ends meet.
‘However, the penalty element of the government withdrawal charge is not justified. We’ve always said the charge should be lower and should simply remove the benefit of the government bonus – rather than eating into some of the money you’ve paid in yourself.
‘At the current level, you’re paying an additional price for doing the right thing and saving for the future.’
A Freedom of Information request by insurer Royal London published last December found savers had already racked up more than £9million in Lifetime Isa withdrawal penalties since April 2018.
Separately, DWP minister Will Quince told a Parliamentary select committee last week that the self-employed who had kept money aside for paying future tax bills would no longer have that taken into account when it came to determine their eligibility for Universal Credit. Instead it would be classed as a business asset.
This is Money has contacted The Treasury for comment but at the time of publication hasn’t had a response.
What counts toward the £16,000 savings limit?
Those who may have some money already set aside who have lost their job or been furloughed as a result may be unsure of whether they can claim Universal Credit, especially if they are grappling with benefits for the first time.
Kate Smith, senior benefits expert at Citizens Advice, said: ‘Understanding how much Universal Credit you’ll be paid can be very confusing, particularly if you need to work out how any savings you have may affect your claim.’
The DWP’s explanation to This is Money was that something which can be used or sold to earn an income counts toward the limit. However, we asked Citizens Advice for some specifics.
To get Universal Credit a claimant must have no more than £16,000 in savings, while they’re making a joint claim for their household, they and their partner must have no more than £16,000 in savings in total.
Those with £16,000 or more in savings are ineligible for Universal Credit. But what actually factors into that figure?
Someone with savings of between £6,000 and £16,000 will get less Universal Credit. It will be assumed that they get a monthly income of £4.35 per month from every £250 they have over £6,000 – it doesn’t matter if they actually get this amount.
This is called ‘tariff income’ and will be added to other income when working out how much Universal Credit someone receives.
Someone with £12,000 in a Lifetime Isa, the maximum they could have saved in the three tax years since it was launched, would lose out on £104 a month.
Savings taken into account include cash, money in bank or building society accounts, including Lifetime Isa savings, one-off payments like redundancy payments or loans, investments including bonds, shares and unit trusts and personal injury compensation.
Land and property are also considered but will not be taken into account if it’s the home you live or plan to live in or are selling, or if a close relative lives there.
Values are judged at the current market or surrender value of the assets, which is the amount you could raise by disposing of them.
A Lifetime Isa, for example, will have a lower value because of the charge for withdrawal.
Meanwhile personal possessions, pension investments, business assets, life assurance policies, or money from the London Emergencies Trust or We Love Manchester Emergency Fund are not counted towards the £16,000 sum.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.