Savers using Lifetime Isas (Lisas) have been hit with £75m in penalties on withdrawals on their savings for retirement and buying homes.
The Lisa, which was launched in 2017 by George Osborne, the then-chancellor, can be opened by those aged 18 to 39. Up to £4,000 can be saved each year, to which a government bonus of up to £1,000 is added.
Some 56,900 people used their Lisa to buy their first home in 2023 to 2024, with the average withdrawal standing at £14,927, up by £1,054 from the year before. Under Lisa rules, the home must cost £450,000 or less.
A saver making a withdrawal from a Lisa for a reason other than buying their first home, being over the age of 60, or with a terminal illness, will face a withdrawal penalty. This is 25pc of the amount being withdrawn. The penalty not only removes the 25pc government bonus, but also 6.25pc of the saver’s own money.
Nearly 100,000 savers were faced with penalties in the 2023 to 2024 tax year, at a cost of £75.3m, up from £54.3m the year before.
Helen Morrissey, of Hargreaves Lansdown, said: “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 said: “Reducing the exit penalty from 25pc to 20pc would ensure that only the effect of the government bonus is removed rather than your own money.”
Rachael Griffin, tax and financial planning expert at Quilter: “The punitive 25pc penalty means that those who have done the right thing by saving are penalised if they need to access their cash.”
She said: “The figures reiterate the desperate need for reform of the Lisa. To simplify the current offering and make it fairer for savers who have no choice but to dip into their savings, the rules should at the very least be adjusted to only take away the bonus rather than raid people’s savings as well.”
Brian Byrnes, from Moneybox, said: “Moneybox is actively calling on the Government to review the price cap regularly, to enable the product to keep pace with property price growth. We are also proposing a more flexible approach to the withdrawal penalty currently imposed to support people who are working hard to invest in their futures.”
Martin Lewis, the consumer champion, has repeatedly called for changes to the Lisa penalties, which can also apply to those buying homes worth more than £450,000. In a post on social media earlier this month, he confirmed that Lisas had been on the agenda of a meeting he had with the Chancellor ahead of the Budget on October 30.
Earlier this year, Mr Lewis said in an open letter to Jeremy Hunt that the limit should be indexed to house prices, writing: “The penalty was imposed to stop Lisas being used for unintended reasons – people are now being fined for using those Lisas on exactly what they were intended for.”
The Treasury was contacted for comment.
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