The scheme which is open to people aged 18-39 and has been backed by Martin Lewis – who has warned of the pitfalls
First-time buyers have been slapped with fines exceeding £13,500 for breaching rules on accessing their savings. A saver who withdraws from a Lifetime ISA (Lisa) for reasons other than purchasing their first home, being over 60 or being terminally ill will face a hefty 25 per cent penalty charge.
In the 2024-2025 tax yearthe average of all charges by HM Revenue and Customs (HMRC) was £789.75. The Lifetime ISA or LISA is a tax-free savings account where the government gives you a 25% bonus on your savings. It is for people aged 18-39 that helps them save for their first home or retirement. It is boosted by a 25% government bonus on contributions up to £4,000 per year, meaning you can receive up to £1,000 annually from the government. Funds can be withdrawn without a penalty to buy a first home or after age 60, but a 25% charge applies for other withdrawals before age 60.
In the last tax year, savers were stung with £102m in withdrawal penalties – a rise from £75m in 2023-2024. This surge was due to both more savers being hit with penalties and higher charges on larger pots, with the average penalty paid being £790.
This included buyers who dipped into their savings to purchase a home above the strict £450,000 limit. There are currently 1.6 million active Lisa accounts, as per the latest HMRC data. In the last tax year, 129,200 savers faced charges, while only 87,000 used their savings to buy a home.
Figures obtained by the Telegraph via Freedom of Information showed that last year, 129,200 LISA savers were penalised £789.75 on average. In 2023 to 2024 99,700 were hit on average with £755.70. The biggest penalties in recent years were in the 2020-1 financial year when 41,700 were hit with an average £1,032,25 penalty charge.
The accounts have been backed by personal finance expert Martin Lewis – but he has highlighted the potential pitfalls. Speaking on his BBC podcast previously he said: “People can open a LISA on the day of their 18th birthday, and they can open one until the day before their 40th birthday. That is the very last time they can open one, and once it’s open, it stays open.”
“When you can open it, it gives you a 25% boost on what you put in. So if you put in £1,000 in one month, the state will add £250 pounds that month, and that will be sitting in your lifetime ISA account. That amount will get interest on top of it as well, and it will keep doing that until you’re age 50. As they have been around since 2017, the oldest people with LISA’s are 46, so we’ve not yet hit it, so they’re still getting that 25% contribution.”
“The most you can put in per tax year is £4,000, which means you can get up to £1,000 free per year, and you get that each year. So if you had it for 10 years, you would have £10,000 free from the state.”
However, Martin warned that there were some “caveats” with the LISA. The first was that if you withdraw your money for any reason other than your first home or retirement, you’ll be charged with a 25% withdrawal penalty, essentially eroding the bonus and cutting into your original savings.
He explained: “Now, you might think you’ve got a 25% bonus and a 25% penalty means you break even—that’s actually not how it works. If you accumulate £10,000 and then get a £2,500 bonus, your account would show £12,500. But a withdrawal results in a balance of only £9,375. In essence, you’re down by £625 from your initial investment because of the punitive withdrawal fee.”
These tax-free accounts have come under fire from MPs and savings experts for being overly complex and failing to fulfil their intended purpose of aiding in saving for house deposits or retirement.
Lifetime Isas were introduced by then-chancellor George Osborne in 2017 and can be opened by those aged between 18 and 39. Up to £4,000 can be saved each year, with a 25pc government bonus of up to £1,000 added.
However, savers who withdraw the money for purposes other than looking to purchase a home or retire could face a 25% penalty on the total value of their savings. This hefty fine not only eliminates the 25% government bonus, but also takes away 6.25% of the saver’s own money.
The Treasury has reportedly collected around £213m in penalties from 286,000 savers due to unauthorised withdrawals over the six years leading up to April 2024. Savers have previously informed HMRC that “unforeseen changes in their circumstances” forced them to withdraw the money, and they felt they had been “further penalised for their misfortune” by the penalty.
If the £450,000 house price cap had risen with inflation since 2017, it would now stand at £604,884. According to the Land Registry, the average UK house price was £272,995 in September this year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The Lisa has an enormously important role in helping people to save for their first home or retirement.
“However, the latest data shows early exit penalties continue to soar with savers being clobbered with £102 million of early exit charges. This is up from £75 million the previous year and shows the Lisa is a product ripe for reform.
“The 25% government bonus for Lisa contributions can really boost people’s savings and help that dream of owning your first home or having a decent retirement feel that bit more real.
“However, the way the early exit penalty works is that it not only takes away the benefit of the government bonus but also a chunk of your own savings. For someone who has saved hard to try and meet a financial goal it’s a tough lesson to take when they need to tap into that income for unforeseen circumstances and then get hit hard with a penalty.”
Some 87,250 account holders withdrew from their Lisa to purchase a first property in 2024/25, an increase of around 30,500 on the previous tax year.
The average withdrawal for a house purchase in 2024/25 was £15,782 – up by around £857 since 2023/24.
Claire Exley, head of financial advice and guidance at JP Morgan-owned wealth manager Nutmeg, said: “Recent Lisa usage is a mixed picture, to say the least, and will likely fuel calls for reform.
“Property purchases using the Lifetime Isa increased significantly during the 2024/25 tax year, likely driven by first-time buyers keen to beat changes to stamp duty rules at the start of April.
“Whether it is rising house prices which have put properties beyond the Lisa house price cap or a change in life circumstances that means people need the money in their Lisa, more savers are handing over their savings to pay the exit penalty.”
The Treasury Committee previously said it was unconvinced that the Lisa effectively targets people in genuine need of financial support.
MPs warned that the Lisa’s dual-purpose design may be diverting people away from more suitable products and putting part of their savings at risk. The Government has committed to working with Lisa providers to improve the messaging around the product.
The HMRC report said around £103 billion was subscribed to adult Isas in 2023/24, an increase of £31.4 billion compared with 2022/23.
