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

SAVERS have been warned about making a common mistake that 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, according to figures from HMRC.

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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 though.

Savers are only allowed to dip into their Lifetime Isa savings pots for specific reasons: either when they are buying their first home, or because they have reached retirement age.

If you access the money otherwise, you’re hit with a penalty charge of 25%.

In 2018-19 and 2019-20, the withdrawal charges were set at 25% but were reduced to 20% through the pandemic to help people access savings.

However, the 25% charge is now back in place and savers are being warned to think carefully before they access their cash.

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

He said the figures show that Lisas are an “ultimately flawed product” which needs a serious rethink.

Moore added: “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.

“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.”

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

Stocks and shares Isas are appealing because they have the potential to grow you money more than a cash account – but, like any investment, they come with risk.

In 2019-2020, some 75% of Isas that were opened were cash accounts, but last year that fell to 66%.

Meanwhile, an extra 860,000 stocks and shares Isas were opening.

Mr Moore predicts this trend will continue as people worry about the effects of inflation on their savings.

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 increased by 15,000 in the last tax year.

The annual savings statistics showed 50,800 people made an average withdrawal of £13,192 from a Lifetime Isa to purchase a home in 2021-22.

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

The Lifetime Individual Savings Account was introduced in April 2017 as a way of helping first-time buyers save for a home, and providing a more easy-access way to save for retirement.

You can save up to £4,000 a year into a Lisa and you’ll get a government bonus of 25% on what you put in.

That means if you put in the maximum £4,000, you’ll get a £1,000 free cash bonus.

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% fee on 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.”

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.

This post first appeared on thesun.co.uk