Experts have been calling on the government to exclude Lifetime Isa savings from calculations to determine whether or not individuals are entitled to claim Universal Credit.

Demand from people seeking to claim the benefit has surged since the coronavirus crisis forced businesses to close or to furlough staff.

However, claimants can only qualify for the payments if their savings are less than £16,000.

The government includes lifetime isa savings in this sum, even though the products were designed to encourage young people to save towards their first home or retirement.

The products can be opened by savers aged between 18 and 39 and provide a government bonus of up to £1,000 a year if you pay in £4,000.

However, if you withdraw the money before you reach the age of 60 for any purpose other than to purchase your first home, the government claws back your bonus plus a penalty by reclaiming 25 per cent of any sum you take out.

This means that anyone who has lost their income and needs to claim Universal Credit must first draw upon their long-term savings at a punitive rate and damage their chances of getting on the property ladder or securing a comfortable retirement.

Former pensions minister and Lane, Clark & Peacock partner Steve Webb has urged the government to review the policy as a matter of urgency.

Reallymoving chief executive Rob Houghton says: “The government’s policy of including Lifetime ISAs in the £16,000 savings limit for accessing Universal Credit makes no financial sense at all and risks undoing years of hard work by diligent first-time buyers.

“It advises that savers should refrain from using Lifetime Isas as short-term savings products, because in doing so they could get back less than they paid in due to the 25 per cent penalty applied to withdrawals. 

“Yet conversely, savers are now being encouraged to do exactly that.

“For most people it takes years and a huge amount of effort to save a deposit for a first home, which is now £23,500 on average according to our latest data, yet through no fault of their own many first time buyers are being forced to tap into their nest egg in order to pay the bills in the short-term.

“At the very least the unfair 25 per cent withdrawal penalty should be reduced to ensure the saver always gets back what they paid in, but the government should go further and remove Lifetime ISAs from the Universal Credit savings limit altogether. 

“Failure to do so could set today’s generation of first-time buyers back several years.”