More than 129,000 savers have been penalised for breaking strict cash withdrawal rules on their Lifetime ISAs, with new HMRC figures revealing the financial sting is growing significantly heavier.
The Rising Cost of Early Access
According to data shared with The Telegraph, the 25 largest penalty charges issued in the 2024-25 tax year averaged a staggering £13,500. This marks a sharp increase from the average of £10,600 seen in the previous tax year.
Over the last financial year, savers were collectively stung with a total of £102 million in withdrawal penalties, a substantial jump from the £75 million recorded in 2023-24.
How the Lifetime ISA Penalty Works
The Lifetime ISA (LISA), launched by then-Chancellor George Osborne in 2017, is designed to help individuals aged 18 to 39 save for their first home or retirement. Savers can deposit up to £4,000 annually and receive a 25% government bonus.
However, accessing these funds outside of the permitted reasons triggers a hefty 25% charge on the full amount withdrawn. The permitted reasons are:
- Buying a first home under the £450,000 price cap.
- Reaching the age of 60.
- Being diagnosed with a terminal illness.
This penalty not only claws back the government's 25% bonus but also erodes 6.25% of the saver's own hard-earned contributions. On average, affected savers lost around £790 each, leaving many financially worse off than if they had never opened the account in the first place.
A Scheme Under Scrutiny
The data reveals a stark contrast: while 129,200 savers faced charges for unauthorised withdrawals, only 87,000 successfully used their savings to purchase a property. Some buyers fell foul of the rules by attempting to purchase homes above the £450,000 limit.
From April 2018 to April 2024, the Treasury has collected approximately £213 million in penalties from 286,000 unauthorised withdrawals.
The scheme has faced criticism from MPs and financial experts who argue it is confusing and overly restrictive. Savers have reported that unforeseen life events forced them to access their savings early, with the penalty acting as a "further punishment" during already difficult times.
A Treasury spokesperson defended the LISA, stating: "The Lifetime Isa remains focused on supporting young people to achieve the aspiration of home ownership, or to build up savings for later life, and in the last year helped around 57,000 people get onto the property ladder."
They added, "We are also committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality."
