The proposed five per cent early exit penalty on the Lifetime ISA is “unnecessary” and “should be abandoned” as the final rules for its implementation are finalised.

Following yesterday’s Budget announcement AJ Bell chief executive Andy Bell said “assuming the Treasury will receive the five per cent penalty there is a huge sense of irony that the government is making moves to ban early exit fees levied by pension providers but is happy to levy one itself”.

“Early exit penalties are a relic of a bygone pension industry and there is no role for them in modern savings products,” he added.

“Unless they are buying their first house, investors will already lose the Government bonus and any interest or investment growth on that bonus if they cash in their investment early. This seems ample deterrent from making early withdrawals.

“The Lifetime ISA is a fairly transparent move away from the current pension system and taking the negative elements of that system and introducing them to ISAs seems counterproductive. The beauty of ISAs is their simplicity. If you compare some of the features of the Lifetime ISA with a SIPP or personal pension, it begins to look a lot less simple.”

Chancellor George Osborne yesterday introduced the new Lifetime ISA for young savers, potentially threatening the future of traditional pension saving.

Delivering his Budget speech, Osborne said from April 2017, anyone under 40 will be able to open a Lifetime ISA, meaning for every £4,000 saved the government will add £1,000 every year until the age of 50.

The Chancellor said he wants to help the next generation build up assets and save, as many do not have pensions because they are "too complex”.

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