Thousands of British savers have been hit with substantial financial penalties for breaking strict withdrawal rules on their Lifetime ISAs, with total charges soaring to £102 million in the last tax year alone.
Soaring Penalties for LISA Rule Breakers
New figures reveal that HM Revenue and Customs (HMRC) issued penalties averaging £789.75 to 129,200 Lifetime ISA users during the 2024-2025 tax year. This represents a significant increase from the previous year, when 99,700 savers faced average charges of £755.70.
The total value of withdrawal penalties reached £102 million in 2024-2025, up dramatically from £75 million in the 2023-2024 tax period. This surge reflects both more savers being penalised and higher charges applied to larger savings pots.
How Lifetime ISAs Work - And When Penalties Apply
The Lifetime ISA scheme, available to people aged 18-39, offers a generous 25% government bonus on savings up to £4,000 annually. This means savers can receive up to £1,000 free money from the state each year towards their first home purchase or retirement.
However, strict rules govern when savers can access their funds without penalty. Withdrawals are only penalty-free for:
- Purchasing a first home (with property price capped at £450,000)
- Reaching age 60
- Being diagnosed with a terminal illness
Any other early withdrawals trigger a hefty 25% charge on the total savings value, which not only removes the government bonus but also cuts into the saver's original investment.
The Hidden Cost of Early Withdrawal
Personal finance expert Martin Lewis, who has supported the LISA scheme, has repeatedly warned savers about the punitive nature of withdrawal penalties. He explains the mathematical reality that many find surprising.
"You might think you've got a 25% bonus and a 25% penalty means you break even - that's actually not how it works," Lewis stated on his BBC podcast. "If you accumulate £10,000 and get a £2,500 bonus, your account shows £12,500. But a withdrawal results in only £9,375. You're down by £625 from your initial investment."
The data shows the severity of some cases, with one first-time buyer receiving a staggering £13,500 penalty for breaching LISA rules.
Calls for Reform Amid Rising Concerns
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, commented: "The Lisa has an enormously important role in helping people save for their first home or retirement. However, the latest data shows early exit penalties continue to soar with savers being clobbered with £102 million of early exit charges."
She added that the product appears "ripe for reform" given how the penalty system works.
Currently, there are 1.6 million active LISA accounts according to HMRC data. In the last tax year, while 129,200 savers faced penalties, only 87,000 successfully used their savings to purchase a property.
The Treasury Committee has previously expressed doubts about whether LISAs effectively target people in genuine need of financial support. MPs have warned that the dual-purpose design may be diverting people away from more suitable products.
With the £450,000 property price cap remaining unchanged since 2017 despite inflation - which would have pushed it to approximately £604,884 today - many savers find themselves penalised for purchasing homes above the limit or facing unexpected life circumstances that force early withdrawals.
