Brits with Lifetime ISAs (Lisas) are facing hefty penalty fees for withdrawing their savings, with the total value of these charges increasing by 40% to £75.2 million in 2023-24, according to HMRC data. The figures have sparked calls from finance experts and money saving specialists for the government to reform the Lisa rules.
While Lisas can be used to fund a property deposit or retirement, withdrawing cash for other reasons incurs a significant penalty fee, unless the individual is terminally ill. HMRC’s data reveals that 56,900 people used their Lisa to purchase their first home in 2023-24, with the property value capped at £450,000. However, 99,650 people made unauthorised withdrawals during the same period, incurring penalties.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, commented: “The Lifetime Isa is proving hugely useful, with almost 57,000 people using one to help them get that all-important first step on the housing ladder in 2023-24. However, there’s massive room for improvement, as around 100,000 people made an unauthorised withdrawal from their Lisa during the same period and got clobbered with a withdrawal penalty.”
She highlighted: “It’s clear the Lisa has huge potential to help people meet their home-owning and retirement needs but reform is needed.” The Lifetime ISA (LISA) scheme allows savers to tuck away up to £4,000 annually, with the government topping this up by 25 percent. Still, she cautioned that for certain withdrawals, there’s a hefty exit penalty that “not only takes away this bonus but also a chunk of your hard-earned savings.”
Ms Morrisey pointed out: “This not only acts as a disincentive for those saving for their first home but also those who want to use it to save for their retirement. This is particularly the case for groups such as the self-employed with variable earning patterns who may prefer the flexibility of the Lisa over a pension.”
Personal finance guru Martin Lewis quantified the non-approved withdrawal penalty at Lisas as being up to £635 in some cases. Elaborating on the conditions, he explained: “You can take the money out only for one of two reasons: number one, you are buying a first-time property, you’ve never bought a property before, you’ve never owned a property before and that property has to be worth under £450,000.
“The second reason is you’ve hit age 60 and then you can take the money out and you get to keep the bonus. No one who has opened the ISA has hit age 60 yet because they haven’t been around long enough. It’s a savings account. It’s just a tax-free savings account, but the real key to it is the 25 percent state bonus. The problem with a lifetime ISA…the big one is if you take your money out for any other reason than to buy a first time qualifying property or at retirement effectively when you’re age 60, you take a 25 percent penalty.”
Martin highlighted an issue with the Lifetime ISA (LISA) scheme as a means to save for a first home, pointing out that the maximum property price eligible under the scheme has remained at £450,000 since its inception in 2016. He explained: “My issue is this: the LISA was launched in 2016. The property threshold limit in 2016 was £450,000 and it remains the same today.
“Many individuals, particularly in London, the southeast and other urban metropolitan areas, have been priced out due to rising house prices. They’ve saved as the government advised for their first property, but now their property is valued over £450,000. To withdraw the money, even to purchase a first-time property which is the purpose of this product, they face a significant penalty.”