Rishi Sunak grilled over plans for 8% pension rise
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Pension plans can be supplemented through Lifetime ISA savings, which not only provide Government bonuses for home purchases but also retirement savings. However, LISA holders will be issued with a penalty for withdrawals not used for either of these purposes and new research showed this is proving to be particularly damaging.
New data gathered by Quilter, the wealth manager, showed LISA early withdrawal charges have more than tripled in a year to £33million in the 2020/21 tax year compared to £10million in 2019/20.
Quilter detailed a Freedom of Information request highlighted over the previous three tax years, a total of £48million had been levied against LISA holders for early withdrawals.
In 2018/19 and 2019/20 the withdrawal charges were set at 25 percent before they were dropped to 20 percent from March 6 2020 to 5 April 2021 to help people impacted by the pandemic to access funds.
However, the original 25 percent charge is now back in place.
The withdrawal penalty is in place to disincentivise people from using a LISA for a purpose other than buying a first home or for retirement.
However, in a bid to help savers, the Government temporarily reduced the charges to 20 percent and this meant account holders would only have to pay back the 25 percent bonus they received, effectively removing the exit fee.
Quilter argued, given there were withdrawal charges of £33million in 2020/21, it implies that the total amount withdrawn from LISAs was around £165million.
In examining the most recent available Government ISA statistics, it was detailed when LISAs were introduced in 2017/18, £486million was subscribed to the product, which increased to £604million in 2018/19.
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Rachel Griffin, a financial planning expert at Quilter, commented on these findings.
Ms Griffin said: “These stark figures illustrate how many people needed to raid their savings to cope with the financial strain brought on them by the pandemic.
“Clearly, reducing the withdrawal charge to 20 percent and thus ensuring savers weren’t unfairly penalised during this difficult time was sensible.
“However, these figures also reveal that the Lifetime ISA has some significant flaws in its design.
“The pandemic has shown the nation that financial strains can be just around the corner for almost everyone.
“The government should realise that while we are hopefully not going to experience another event like the Covid crisis, other personal and financial crises will still happen each day and the 25 percent LISA withdrawal charge penalises savers who simply can’t predict their financial future.
“The products are meant to be a hybrid between a retirement savings vehicle and an ISA product for first time buyers. Unfortunately, while the product strives for the best of both worlds it falls short.
“Lifetime ISAs are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.
“They were a muddled idea to start with and the Government should carefully consider their place in the long-term future of the UK’s savings system.”
The importance of effective ISA utilisation was also highlighted by recent HMRC statistics which showed Income tax bills have doubled since 2000.
A recent survey from Hargreaves Lansdown also warned many retirees are unaware of their best options, with the survey of 2,000 people showing:
- Almost half of basic rate taxpayers don’t know the most tax-efficient way to save for retirement (43 percent).
- More than half of women (53 percent) don’t know the most tax-efficient way to save for retirement, and 42 percent of men.
- Only one in 20 people think a Lifetime ISA might be the most tax-efficient way to save for retirement (six percent)
At the time, Sarah Coles, a personal finance analyst at Hargreaves Lansdown, issued a stark warning on this: “We haven’t a clue about the most tax-efficient home for our retirement savings. As a rough rule of thumb, for a basic rate taxpayer you get the biggest tax boost in a LISA and for a higher rate or additional rate taxpayer it’s a pension. But when asked to pick the most tax-efficient for them, half of people didn’t even want to hazard a guess, while among those who took a stab at an answer, only five percent of basic rate taxpayers picked the LISA.
“It’s hardly surprising there’s so much confusion, because when you’re weighing up the tax benefits of each, they aren’t even explained in the same language. With a pension, people talk about tax relief, whereas with a LISA they talk about the taxman topping up your contribution. It doesn’t help either that the rules differ when you withdraw money too.
“To make matters more complicated, the rough rules of thumb don’t work for everyone. If you’re over the age of 39, for example, then you can’t get a LISA, so you need to check the details of your chosen scheme.
“Even when you’ve got to grips with the tax arrangements, bear in mind that tax isn’t the only consideration. It also depends enormously on who else is paying into your retirement savings. It means that for most basic rate taxpayers (or at least the ones with a LISA), the best option for the first chunk of your money is your workplace pension, then for the next chunk it’s the LISA, and then once you’ve used that allowance, it’s back to the pension. It’s hardly surprising that so many people are unsure of the best approach.”
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