Lifetime Isa savers will be subject to ‘overly punitive’ exit charge

Experts at fund shop A J Bell have pointed out that customers may be facing the prospect of losing nearly half of their investment gains as a result of an “overly punitive” government exit penalty.

The ISAs will allow annual contributions of up to £4,000 between the ages of 18 and 50, with savers illegible for a 25 per cent top-up from the Government on retirement.

However, it has become clear that should the pot be accessed before the age of 60, for reasons other than a first property purchase or critical illness, the bonus is clawed back and a 5 per cent penalty will be imposed.

Research from A J Bell showed the devastating impact that the exit charge could have on savings.

Someone who saved the maximum allowed for 10 years could build up a pot worth £62,432, assuming 4 per cent annual growth.

Yet if the exit charge were applied, the value of the Isa would be reduced by £15,608 – accounting for 45 per cent of all investment growth generated over a full decade of saving, A J Bell said.

Tom Selby, a senior analyst at A J Bell, said the Lifetime Isa exit fee was “overly punitive” if people needed emergency access to their savings. He said the Government should not scrap the penalty entirely, but limit it to recouping the state top-up.

“A 25 per cent exit charge on the whole fund, including investment growth, has a disproportionate impact on the end value an investor would be left with,” he said.

“We’d like the Government to reconsider the level of the early exit penalty before the Isa is launched and ensure it is set at a level that enables the government bonus to be recouped, plus investment growth on that bonus, but does not eat into the investment growth achieved on the individual investor’s personal contribution.

“If it doesn’t make these changes, investors will have to be very sure that they will not need access to their savings for reasons other than a house purchase before locking funds into a Lifetime Isa.”