Warning as common mistake could cost you 25% of your savings | The Sun

BRITS have been warned about this common mistake many people make which could see a quarter of their savings wiped out.

Savers with a lifetime ISA (Lisa) lost out to the tune of more than £33million due to early withdrawal charges in the last tax year, figures from the HMRC have revealed.

That figure is just over £1m less than in 2020-21 when people dipped into their savings during the Covid pandemic to keep themselves financially afloat.

The startling figures are, in part, due to withdrawal charges going back up to 25 per cent.

In 2018-19 and 2019-20, the withdrawal charges were set at 25 per cent before they were dropped to 20 per cent from March 6, 2020 to April 5, 2021 to help people impacted by the pandemic to access funds.

However, the 25 per cent charge is now back in place.

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Shaun Moore, a tax and financial planning expert at Quillers, said: “These stark figures illustrate how many people were still struggling to pay bills last year and have decided to stomach the 25 per cent charge just to get their money out.

“This also points to the Lisa being an ultimately flawed product that needs a serious rethink.

“The Covid crisis should have taught us that in times of financial hardship we should not be penalising people for using their savings to keep their heads above water.

“But with more people than ever struggling with their finances, we are back to penalising savers who simply can’t predict their financial future and now dealing with huge energy and food bills.”

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The news comes after it was revealed cash ISAs seem to be losing their appeal with savers preferring stocks and shares ISAs.

The share of accounts subscribed to cash has fallen to 66 per cent of accounts, down from 75 per cent in 2019 to 2020.

Meanwhile the number subscribing to stocks and shares ISAs increased by around 860,000.

Mr Moore predicts this trend will continue due to inflationary pressures wiping out the value of their savings and people look for potentially better returns.

He said: “Even the very best interest rates on Cash ISAs at the moment will do nothing to stop the rotting effect of inflation on people’s savings which are losing value all the time.”

Earlier this month, figures from the HMRC revealed the number of people using a Lisa to purchase their first home rose by 15,000 in the last tax year.

The annual savings statistics showed 50,800 people made withdrawals from their Lifetime ISA to purchase a home in 2021-22.

The average withdrawal was £13,192 – a £700 increase on the previous year.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “LISAs are playing a vital role in helping people realise their dream of purchasing their first home.

"We saw 50,800 people making Lisa withdrawals for this purpose in 2021-22 – a massive 15,000 increase on the previous year.

"However, reform is needed if more people are to be helped. We might be seeing early signs of cooling in the housing market, but this comes off the back of a long period of huge house price growth and for many first-time buyers, particularly in the South-East, the current limit of £450,000 for a first-time home is becoming increasingly difficult to manage.

"Those who purchase a home worth more than this risk being penalised and losing not only their hard-earned bonus but also a chunk of their own savings too."

What's a lifetime Isa and can I get one?

The Lifetime Individual Savings Account was introduced in April 2017 as a way of providing a longer-term tax-free savings account.

The scheme was designed with an eye on helping people save towards your first home or retirement.

A Lisa gives you a government bonus of 25 per cent of the money you put in, up to a maximum of £1,000 a year.

That means if you put in £4,000 a year you'll get a £1,000 free cash bonus to put towards your first home.

If you save the maximum amount between the ages of 18 and 50 you could get as much as £32,000 for free.

You'll also earn tax-free interest on your savings pot, including on the added extra from the government.

Lisa accounts are open to anyone aged 18 to 39 and you can keep saving in one until you are 50-years-old.

If you opened a Lisa at age 18 and saved the maximum amount for 32 years you'd get £32,000 of free government cash.

With a Lisa, you can buy homes worth up to £450,000 in London and £250,000 outside London.

However, you'll be charged a 25 per cent fee of the amount withdrawn – including the bonus – if you want to use it for something other than its specific purposes or if you buy a home above the threshold.

In March, money saving expert Martin Lewis urged anyone under the age of 40 to make the most of the potential savings with a Lisa.

Mr Lewis said at the time: "If you hope to buy your first home in the next 10 years, put £1 in a Lisa now.

"Lifetime Isas give first-time buyers a 25% bonus (up to £1,000 a year) on their savings, but only after it's been open a year.

"So open one with £1 now, to start the clock, so it's usable if/when needed."

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Anyone considering investing in any sort of ISA is urged to consult a financial adviser.

Looking to buy your first home? Check out our first-time buyer guide.


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