Thousands of Lifetime ISA savers slammed with multiple withdrawal penalties
Thousands of Brits who saved into a Lifetime ISA were hit with multiple withdrawal penalties in a single tax year, as calls for the government to ensure the replacement product is fit for purpose grows.
Roughly 45,000 savers were penalised for unauthorised withdrawals from Lifetime ISAs (LISA) in the 2024/25 tax year, according to an FOI request from financial app Plum to HMRC.
The average saver penalised more than once lost roughly £760, as 33,530 were hit with fines ranging up to £999.
Nearly 4,000 Brits incurred fines in excess of £2,000, while 60 were slapped with charges surpassing a staggering £8,000.
“These are significant sums of money for first-time buyers who already face considerable obstacles to getting a foot on the housing ladder,” said Rajan Lakhani of Plum.
Brits who suffered multiple LISA penalties accounted for around a third of the 129,200 people penalised that tax year.
‘Flawed and outdated’
The LISA has been subjected to mass scrutiny and criticism in recent years, as banks and asset managers called out “flawed and outdated” rules.
The savings product was launched in April 2017 by the Conservative government, allowing individuals aged 18 to 40 to contribute £4,000 tax free each year, to either put towards a first home or retirement.
But many have called out the scheme arguing they are unable to benefit as the product’s property price has been frozen at £450,000 since its introduction, despite house inflation.
This has locked out many buyers in London and the South East. The average house price hit £531,548 in September, according to figures from the Official of National Statistics.
Purchasing a home above this cap is classified as an unauthorised withdrawal, triggering the penalty. Holders are subject to a 25 per cent penalty on the total withdrawn, including the government bonus and their own money, causing many to have less than originally started.
Savers putting in £1,000 would receive a bonus of 25 per cent making their pot worth £1,250. But if they withdrew that £1,250 in cash they would lose £312.50, leaving them with £937.50.
New Lifetime Isa product battle
Lakhani said the loss of significant sums has caused people to shift their focus to ensuring the new First Time Buyer ISA is “fit for purpose”.
Plans for replacing the LISA were first outlined in former chancellor Rachel Reeves’ 2025 Autumn Budget, before confirming the new product would be introduced in a consultation published by the Treasury in June. The government conceded the product was “not working well for many” and “putting off some savers”.
The new product, which is yet to be given an official launch date by the government, is expected to remove the option of using funds for retirement and add the bonus only when a saver is ready to purchase a property. It will also have no upper age limit.
It will also eliminate cash withdrawal penalties which many would-be first-time buyers may have felt necessary to cover day-to-day living expenses.
But providers are urging the government to remove the national cap in favour of a regional one, reflecting how price inflation is hitting different areas of the UK, while others, including Plum, have called for the national limit to be increased to roughly £600,000.
Lakhani said: “First-time buyers in London and the South East face the most acute affordability challenges in the country. The effect of the existing Lifetime ISA… has shut many out of the housing market altogether.”
But some firms have argued the Lifetime ISA should not be replaced, calling instead for improvements to the existing product, arguing the shake-up will add further complexity.
“The Lifetime ISA…needs targeted improvements,including to the withdrawal penalty and house-price cap, but these changes can be made now for the people already relying on it,” said Moneybox’s Brian Byrnes.
“We should not replace a product that is already helping people buy a home with a new first-time buyer ISA. Nor should people already relying on the Lifetime ISA have to wait until 2028 for much-need improvements to the product.”