Lifetime Isa Penalties Hit Thousands of Savers

Tens of thousands of individuals holding the UK government's Lifetime Isa (Lisa) have been subjected to multiple penalties for withdrawing their savings, according to data released by the government and analyzed by the money app Plum. In the 2024-25 tax year, approximately 45,000 Lisa savers were penalized more than once for unauthorized withdrawals.

The average loss for these savers was £760, but some faced significantly higher charges, with a few incurring penalties exceeding £11,000. These penalties apply to the total amount withdrawn, not just the bonus funds, meaning savers can lose not only the government bonus but also a portion of their own contributions.

For instance, if a saver deposits £1,000 and receives a £250 bonus, their pot grows to £1,250. A withdrawal of this entire amount would incur a 25% penalty on £1,250, resulting in a loss of £312.50, leaving the saver with £937.50, which is £62.50 less than their initial deposit.

The data further indicates that over 11,000 savers lost more than £1,000, and 3,970 savers incurred combined fines exceeding £2,000. In the most severe cases, the average combined penalties per person surpassed £11,000.

These 45,000 individuals with multiple penalties represent about a third of the 129,200 savers penalized during that tax year. While a single penalty might occur if a buyer's desired property exceeds the £450,000 price cap, repeated penalties suggest that savers may be dipping into their Lisas for emergency funds or may not fully understand the account's withdrawal conditions.

Transition to New First-Time Buyer Account

In response to these challenges, the Treasury has consulted on a new first-time buyer Isa, slated to replace the Lifetime Isa in 2028. This new product is designed to streamline the process for aspiring homeowners by adding the government bonus only at the point of purchase, thereby eliminating withdrawal penalties. However, this change means savers will not accrue interest on the bonus funds before buying a home.

Savers who already hold a Lifetime Isa will be permitted to keep their accounts open and continue receiving the bonus. Calls have also been made to increase the Lifetime Isa's property price cap from £450,000, which has remained unchanged since its launch in 2017, to reflect housing inflation, with suggestions to raise it to around £600,000. This adjustment is seen as particularly crucial for buyers in high-cost areas like London and the South East, who currently face limited options due to the existing cap.