Reform required ahead of Consumer Duty 'foreseeable harm ' rule - expert

Wealth management firm Quilter has called on the government to reduce LISA penalty and require enhanced warnings on direct sales.

The number of people making unauthorised withdrawals from a Lifetime ISA (LISA) rose by 56 per cent to 74,650 in the 2022/23 tax year, up from 47,850 in 2021/22. This amounted to a huge £47.2 million hit to savers in the form of unauthorised withdrawal charges as more people ripped cash out of their savings to help make ends meet.

The unauthorised withdrawal charge currently sits at 25 per cent, which not only removes the government 's bonus but eats into people 's own savings too.

This charge was reduced to 20 per cent during the pandemic to reflect the challenging financial situations many found themselves in, yet despite the cost-of-living crisis, savers have not been given the same grace.

As of 31 July, the Financial Conduct Authority 's Consumer Duty will come into force, which includes the anticipatory concept of 'foreseeable harm ', meaning firms must take all reasonable steps to avoid causing foreseeable harm to their customers.

Intermediated sales where a customer has sought advice before paying into a Lifetime ISA will have ensured that the amount being paid is only as much as the individual can afford to have locked away even if times get tough, but direct sales where customers are not supported through this decision-making process could result in more customers needing to claw back their savings if they have overcommitted.

Quilter is calling for the government to reduce its unauthorised withdrawal charge to 20 per cent - in line with its previous commitment during the pandemic - and to require enhanced warnings of the risks around the government withdrawal charge for non-advised sales.

These warnings should not only be clear at the time of a Lifetime ISA being set up, but also as an alert each time a customer makes a top-up payment to ensure they are well informed and can make a better judgement as to whether they can afford to lock their money away for the long term.

Rachael Griffin (pictured), tax and financial planning expert at Quilter, says: “The Lifetime ISA provides a generous government bonus for people who are looking to save for their first home or later life, but the huge rise in the number of people making unauthorised withdrawals suggests that many people may have overcommitted when saving and are being penalised for needing to access the money to help make ends meet.

“LISAs were first launched in a very different economic environment, and young people are now finding it much more difficult to get onto the property ladder. Even with a substantial deposit, high house prices and rising interest rates are making it unaffordable for many and at a time when money is tight, it is more likely that people will need to access the funds they have locked away.

“People should be encouraged to save for their futures, but only as much as is appropriate for them and in the right savings vehicles. The generous government LISA bonus is enough to draw people into the Lifetime ISA, but the foreseeable harm of the high penalty charge punishes people for trying to make the most of it. ”