HMRC has received around £56 million in withdrawal penalties on Lifetime ISA accounts since 2018, according to analysis by the Telegraph. These accounts are designed to help savers put money aside for their first home and retirement, offering a 25% Government bonus each year up to a maximum of £1,000.
However, a steep 25% penalty applies if savers withdraw their funds for reasons that do not meet the Government’s criteria. This includes thresholds on house prices that have not changed since the accounts were first created.
How the penalty works
Lifetime ISAs, or LISAs, are tax-free savings accounts allowing savers to deposit a maximum of £4,000 per year and receive a 25% Government-backed bonus worth up to £1,000. The penalty for withdrawals that do not meet the criteria is also 25%, but few savers realise this claws back more than just the bonus.
UK property-market specialists at Sylvest explained that if a saver puts aside the maximum £4,000 in a year, they will get a 25% bonus of £1,000, making their total savings £5,000. If they then withdraw this amount for an unsanctioned reason, the penalty is 25% of the £5,000, which is £1,250. This means the penalty has also taken £250 of the saver’s own contributions.
Impact on first-time buyers
Savers wanting to use a Lifetime ISA to buy their first home must meet a range of criteria to avoid the penalty, including only buying properties worth £450,000 or less and using a conveyancer or solicitor. Despite rising house prices, the £450,000 threshold has not changed since 2017, leaving some first-time buyers forced to take the penalty even if they meet all the other withdrawal rules.
A Treasury spokesman responded: “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.”
Potential replacement product
Earlier this year the Government recognised the shortcomings of Lifetime ISAs particularly for first-time buyers and is now consulting on a “new, simpler, ISA product” specifically to support people buying their first homes. The proposed product will be a First Time Buyer ISA or FTB ISA.
The consultation suggests the new product will also have a Government bonus that is only paid at the time that a saver withdraws their funds, removing the need for a withdrawal penalty entirely. However, it will also have a price cap for the value of a home being purchased.
