Since 2018, around £56 million has been paid to HMRC in withdrawal penalties on Lifetime ISA (LISA) accounts, according to The Telegraph. The penalty applies when savers withdraw funds for reasons other than retirement or buying a first home, and it can take more than just the Government bonus.
How the penalty works
LISAs are tax-free savings accounts that operate like a cash ISA, but the Government adds a 25% bonus each year, up to £1,000. Savers can only use their funds for two specific reasons, and withdrawing cash in any other circumstances results in a 25% penalty.
UK property-market specialists at Sylvest explained that if a saver puts aside the maximum £4,000 in a year, they get a 25% bonus of £1,000, making their total savings £5,000. If they withdraw this amount for an unsanctioned reason, the penalty is 25% of the £5,000, which is £1,250. This means the penalty also takes £250 of the saver's own contributions.
Rules for first-time buyers
The only ways to withdraw funds without a penalty are for retirement or buying a first home, but the latter comes with strict conditions. First-time buyers must meet all of the following to avoid the penalty:
- The property costs £450,000 or less.
- The property is bought at least 12 months after their first LISA payment.
- They use a conveyancer or solicitor.
- They buy with a mortgage.
- They do not get a private mortgage from a relative, spouse, or civil partner.
- If buying with someone else, both people must be first-time buyers.
The £450,000 limit has not changed since the accounts were created in 2017, despite rising house prices. As a result, first-time buyers could face the penalty even if they meet all other rules.
Calls for reform
Experts have warned that these rules are “punishing” savers. Some have recommended increasing the property price limit, while others suggest lowering the penalty amounts.
A Treasury spokesman said: “We recognise that the Lifetime ISA is not working for everyone, particularly when people’s circumstances change. That is why we are consulting on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals.”
