A person making a card payment

Calls for LISA reform amidst Consumer Duty ‘foreseeable harm’ rule

The number of people making unauthorised withdrawals from a Lifetime ISA (LISA) rose by 56% to 74,650 in the 2022/23 tax year – up from 47,850 in 2021/22 – leading to calls for reform in the context of the Consumer Duty’s “foreseeable harm” rule.

The withdrawals 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%, which not only removes the government’s bonus, but eats into people’s own savings too. This charge was reduced to 20% 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.

On the 31st July, the Financial Conduct Authority’s Consumer Duty came 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.

The sale of Lifetime ISA products will be brought into question, as the increase in penalties shows some customers find it difficult to predict a future squeeze on spending which means they subsequently need to withdraw their funds for a reason other than to buy a first home or to fund retirement.

Financial planning firm Quilter has therefore called for the government to reduce its unauthorised withdrawal charge to 20% – 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.

Rachael Griffin, tax and financial planning expert at Quilter, said:

“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.”

Rachel said that it is “impossible to accurately predict what might happen to the economy, let alone the policy changes the government might make such as those seen at the infamous ‘mini budget’ last year, and this can make financial planning all the more complex”. She continued:

“Those who seek professional financial advice benefit from the expertise and knowledge of a financial planner who can help them assess what would happen to their finances in various scenarios and can therefore make informed decisions. In comparison, someone going it alone would have a much harder time trying to navigate where best to save their money and how much they can commit.

While there should of course be limited friction when it comes to customer interactions with their finances, in this instance the positive friction of a reminder when a customer tops up their LISA that the money is locked in and there is a penalty should they need to withdraw it would be a good way to ensure people go in with their eyes wide open. Coupled with a reduction of the unauthorised withdrawal charge, savers could feel much more confident that they are making an informed decision.”

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