HMRC has collected more than £56 million from savers through Lifetime ISA withdrawal penalties since 2018, according to an analysis of government data by The Telegraph. Around 129,000 account holders made unauthorised withdrawals in the 2024-2025 tax year, an increase from the previous year.
Failed product needs reform
Luke Kosky of Freetrade said the Lifetime ISA is a failed product in need of reform. He said: “We have a failed product that we desperately need to reinvent, and punishing people for using a product that promised to be beneficial is a terrifying message for those saving for the future.”
The Treasury Committee has previously expressed scepticism about the effectiveness of the Lifetime ISA in targeting those genuinely in need of financial support. MPs have warned that the dual-purpose design could be leading people away from more suitable financial products and putting a portion of their savings at risk.
Charge details and impact
The accounts launched in 2017. The charge is applied when a saver withdraws money for a reason other than buying their first home, suffering a terminal illness, or reaching age 60. HMRC applies a 25% charge to the entire amount withdrawn, rather than reclaiming the government bonus.
Each year, a 25% government bonus is added to the account. For example, if a person puts in £4,000, they get a £1,000 bonus. If they then had £5,000 in their account and a 25% charge was applied, they would be left with £3,750.
Calls for change
Tom Selby of AJ Bell described the withdrawal charge as “the biggest flaw in the product design”. He said: “Frustratingly, it could be easily fixed by reducing the overall withdrawal charge from 25 per cent to 20 per cent. The fact this penalty is netting the Treasury a tidy sum every year is undoubtedly a factor in their belligerence on this issue.”
The Government has pledged to work with providers to improve communication around the product. A HM 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.”
