Tens of Thousands Penalized for Multiple Lifetime Isa Withdrawals

Tens of thousands of savers in the government's Lifetime Isa (Lisa) have incurred multiple penalties for withdrawing their own cash, according to data obtained via a freedom of information request 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 individuals was £760, but some faced charges exceeding £11,000. The penalties apply to the total amount withdrawn, meaning savers can lose not only the government bonus but also a portion of their own contributions. For example, withdrawing £1,250 from a pot that included a £250 bonus would result in a £312.50 penalty, leaving the saver with £937.50 – a net loss of £62.50 from their initial contribution.

The data indicates that 45,000 individuals who experienced multiple penalties represent about a third of the 129,200 people penalized during that tax year. While a single withdrawal penalty might occur if a planned home purchase falls through or exceeds the £450,000 price cap, repeated withdrawals suggest savers may be accessing funds for emergencies or may not fully understand the account's terms.

Lifetime Isas are available to individuals under 40, with contributions possible until age 50. The government contributes a 25% bonus, up to £1,000 annually on a maximum £4,000 deposit. Funds can only be used for a first home purchase under £450,000 or for retirement. Withdrawals for any other reason are subject to a 25% penalty on the total withdrawn amount.

A breakdown of penalties for those charged more than once in 2024-25 shows:

• £0 - £999: 33,530 individuals
• £1,000 - £1,999: 7,470 individuals
• £2,000 - £2,999: 2,350 individuals
• £3,000 - £3,999: 820 individuals
• £4,000 - £4,999: 370 individuals
• £5,000 - £5,999: 200 individuals
• £6,000 - £6,999: 110 individuals
• £7,000 - £7,999: 60 individuals
• £8,000+: 60 individuals

This situation has prompted calls for adjustments to the Lifetime Isa rules, including increasing the property price cap to account for inflation since its 2017 launch. Rajan Lakhani, personal finance expert at Plum, suggested the cap should rise to around £600,000, particularly for first-time buyers in high-cost areas like London and the South East.

In response to concerns about home affordability, the Treasury launched a consultation in June on a new first-time buyer Isa, slated to replace the Lifetime Isa in 2028. This new product is intended to eliminate withdrawal penalties entirely. However, it will not allow funds to be used for retirement, and the government bonus will only be applied at the point of home purchase, meaning savers cannot accrue interest on it beforehand. Existing Lifetime Isas will remain open, and bonuses will continue to be collected.