4) Cut the LISA withdrawal penalty to 20%
If you take cash out of the LISA before the age of 60 – for any reason other than to buy your first property – you face a penalty of 25%. While it may look like you are just giving up the government bonus it’s more complicated than that, because it also takes a chunk of the money you have invested too (£6.25 of every £100).
If you put £4,000 into your LISA, you would receive the 25% government top up which brings the sum of your LISA up to £5,000. If you then withdraw that £5,000 you will pay 25% on that which comes to £1,250 so you are eating into your savings.
Last year the government temporarily reduced the LISA penalty to 20% in response to the pandemic. Despite this a recent FOI showed £34m was paid in penalties last tax year – more than three times the amount paid in the previous tax year. Our own client data shows 8221 clients have paid a penalty to withdraw. The government has since reinstated the 25% penalty.
5) Re-think the limit on the value of the property you can buy with a LISA
A second issue is that people can only use their LISA to purchase a home worth £450,000 or less. If your dream home costs more than that, again you get hit with the penalty. Recent ONS data showed the average first time home cost £222,997 on average but for those wanting to buy in the capital they have significantly less headroom with average first-time house prices at £444,592.
The government needs to consider linking this limit to house price inflation, or introducing regional variations, to protect people who simply want to buy an average property.
6) Treat ISAs and pensions consistently when it comes to inheritance tax
Pensions can be passed on tax free after your death, but ISAs are potentially subject to inheritance tax. This could distort the way people view their retirement finances, and put them off saving into an ISA alongside their pension to create a valuable tax-free source of funds in retirement. The two should be treated consistently.”
ISA timeline
- 1999 April 6: ISAs launched – with mini and maxi ISAs, and cash, stocks and shares and insurance options. The overall allowance was £7,000.
- 2006 April 6: insurance ISAs were scrapped
- 2008 April 6: maxi and mini ISAs were scrapped and an overall ISA limit with a cap on how much could be held in cash was introduced instead. ISA savers could switch from cash to stocks and shares. Existing PEPs became ISAs automatically and the allowance was raised to £7,200
- 2009 April 6: a separate allowance was introduced for those aged 50 and over – at £10,200
- 2010 April 6: the allowance for everyone was equalised at £10,200
- 2011 November: Junior ISA launched
- 2014 July: NISAs launched. Transfers were allowed from stocks and shares to cash. Savers were able to hold as much of their ISA in cash as they wanted.
- 2014 December: ISAs allowances could be passed to your spouse on death
- 2015 April 6: Child Trust Funds could be transferred into JISAs
- 2015 December: Help to Buy ISAs were introduced
- 2016 April: Innovative finance ISAs were introduced. Freedom was given to allow savers to dip into some ISAs and top up before the end of the tax year.
- 2017 April: Lifetime ISAs were introduced. The ISA allowance was raised to £20,000
- 2019 December: Help to Buy ISAs closed to new entrants (and will close altogether by December 2030).
- 2020 September: The first maturing Child Trust funds rolled into adult ISAs.
