Young Britons saving for their first home have been hit with more than £100 million in penalties from a government scheme designed to help them onto the property ladder, shocking new data reveals.
Savers paid £102 million in withdrawal charges on Lifetime ISAs during the 2024-25 tax year, a dramatic increase from £75 million the previous year, according to figures obtained by The Telegraph.
The Lifetime ISA Trap
The Lifetime ISA was launched in 2017 as a solution for younger generations struggling to save for property. Available to 18-39 year olds, the scheme offers a 25% government bonus on annual contributions up to £4,000.
However, the initiative contains a critical flaw that has become increasingly problematic over time. The £450,000 property price cap, set when the scheme launched eight years ago, has failed to keep pace with rampant house price inflation, particularly in London and the South East.
Gabriel Nussbaum, a 28-year-old who lost £1,462.30 of his own money through the scheme, shared his experience. "I thought I'd found a cheat code," he said. "At 21, I put in £4,000, then again at 22 and 23. That's £12,000 of my money plus £3,000 government bonus, all invested and growing."
The Penalty Problem
When Nussbaum went to buy his first property at 28, his pot had grown to £17,849.19. However, like many in the capital, he discovered the £450,000 limit made the property he wanted ineligible.
The withdrawal penalty of 25% applies to the entire pot, not just the government bonus. In Nussbaum's case, this meant losing not only the £3,000 bonus but £1,462.30 of his own investment growth and original contributions.
"The penalty doesn't just take back the £3,000 government bonus, it takes £1,462.30 of my own money too," he explained. "That's money that could have gone toward a deposit. Money that would still be mine if I'd used a normal Stocks & Shares ISA instead."
The average penalty paid by savers was £790, with the largest 25 penalties averaging a staggering £13,500 each.
Call for Government Action
With the autumn Budget approaching, campaigners are urging Chancellor Rachel Reeves to address what they describe as a "punitive" system that penalises young people for circumstances beyond their control.
Nussbaum has outlined three key reforms needed:
- Backdate the property cap to reflect house price inflation since 2017, immediately raising it to approximately £600,000
- Scrap the penalty on investment growth, ensuring savers at minimum recover their original contributions
- Index the limit to house price inflation to prevent the same problem recurring
"The product that was supposed to help me buy my first home was about to penalise me for wanting to buy my first home," Nussbaum stated. "I'm one of the lucky ones who can even afford to buy at all. That £1,462.30? I needed it six months ago. I still think about it now."
The situation highlights the growing challenge facing first-time buyers across the UK, with the average purchaser now in their mid-30s and increasingly looking for family homes rather than starter flats - properties that frequently exceed the £450,000 threshold in many southern regions.
As more young savers approach the age where they're ready to purchase, campaigners warn that without urgent reform, the Lifetime ISA will continue to function as a trap rather than the helping hand it was intended to be.
