Thousands of Lifetime ISA savers slammed with multiple withdrawal penalties

In the 2024/25 tax year, approximately 45,000 individuals who had invested in Lifetime ISAs (LISA) faced multiple withdrawal penalties, according to a Freedom of Information (FOI) request filed by financial app Plum to the UK's HM Revenue & Customs (HMRC). On average, these penalised savers were fined more than once, losing around £760 each.

Notably, 33,530 individuals were hit with fines ranging up to £999, while nearly 4,000 people incurred penalties exceeding £2,000, and a mere 60 faced charges surpassing £8,000. Plum's Rajan Lakhani highlighted that these amounts represent significant sums for first-time buyers already grappling with substantial challenges in securing a home.

The LISA, launched in April 2017, permits individuals aged 18 to 40 to contribute £4,000 annually, tax-free, towards a first home or retirement. However, the scheme has faced criticism for its inflexible property price cap of £450,000, which many argue is outdated and fails to account for housing price inflation. As a result, many prospective buyers in expensive regions like London and the South East are left unable to benefit from the scheme.

The average UK house price has surpassed £531,548, making purchases above this threshold classified as unauthorised withdrawals, triggering a 25% penalty on the total withdrawn, including the government bonus and the saver's contribution. For instance, a £1,000 contribution would garner a 25% bonus, bringing the total to £1,250.

Yet, withdrawing this amount would incur a £312.50 penalty, leaving the saver with £937.50. Financial experts argue that the LISA's current rules are "flawed and outdated" and that the government should ensure that the forthcoming First Time Buyer ISA is "fit for purpose". Plans for the replacement product, yet to be named, were first announced in the 2025 Autumn Budget, with the Treasury confirming its introduction through a consultation in June.

The new ISA is expected to eliminate retirement funds usage, retain the bonus only upon property purchase, and remove the upper age limit. Additionally, it will do away with cash withdrawal penalties to accommodate day-to-day expenses. However, providers are urging the government to implement a regional cap reflective of varying property inflation rates across the UK, rather than a national cap, or to increase the current £450,000 limit to roughly £600,000.

While some argue for improvements to the existing LISA, including adjustments to withdrawal penalties and the house-price cap, others contend that replacing the LISA with a new product would only add complexity, and that first-time buyers should not have to wait until 2028 for necessary enhancements.