Lifetime Isa: More than 185,000 savers fined for withdrawing personal money

More than 185,000 Lifetime Isa savers have been fined for withdrawing their own money, a freedom of information request has uncovered.

And the proportion of account holders fined for making these ‘unauthorised withdrawals’ has more than doubled in just three years, according to the request made by mortgage lender MPowered.

The uptick in savers charged the penalties is down to rising house prices according to MPowered, which also analysed existing data from HM Revenue and Customs.

This is because savers face a charge if they withdraw Lifetime Isa money for any reason other than to buy a first home costing £450,000 or less, to help fund retirement after the age of 60, or because they are terminally ill.

This is classed as an ‘unauthorised’ withdrawal under the scheme’s rules, and the saver is charged a penalty equal to 25 per cent of the amount taken out.

Because this fine applies to the whole pot and not just the amount the saver paid in, it not only means they lose the 25 per cent Government bonus paid on savings of up to £4,000 each year, but also some of their own cash.

As house prices have gone up, more people are buying homes that breach the £450,000 limit and incurring the charge. 

The average home in London now exceeds that limit, as well as in 27 other local authorities around the UK including Oxford, Cambridge and Buckinghamshire.

The total amount savers have lost to withdrawal charges since the Lifetime Isa, also known as a Lisa, launched in 2017 is £127million, which includes lost interest, according to MPowered. The average penalty paid per saver has been £684.

Seven per cent of Lisa savers made an unauthorised withdrawal in 2022-2023, it found, compared to only 3.2 per cent in 2019-20.

MPowered also said that since launch, just 12 per cent of Lisa savers, around 170,000, have successfully used their account to buy a home.

The rest are either still saving, with around £4billion held in Lisas at the Government’s last count in 2022, or have withdrawn it.

As Lisas are only for those under 40 and the scheme started in 2017, no account holders have reached the age of 60 yet.

Stuart Cheetham, CEO of MPowered Mortgages, said ‘Lifetime Isas were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.

‘The Lisa withdrawal penalties are designed to ensure savers only use these accounts for what they are designed for – buying a first home or saving for retirement – but the cap on the value of property they can be used for means Lisas are increasingly unfit for purpose.’

How do Lisas work?

There are currently 1.06million Lisa accounts open.

Savers under the age of 40 can open a Lisa and until they hit 50, the Government will pay a bonus of £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year you can put into the account.

Two people buying a home together can each use their Isa towards a deposit, but the value of the property still must not exceed £450,000.

Because the withdrawal fine applies to the whole pot including the bonus, and not just the amount the saver paid in, it not only means they lose the 25 per cent Government bonus, but also some of their own cash.

An example of how this works from the Government website is as follows:

Assuming no growth, initial savings of £800 will earn a 25 per cent Government bonus of £200 and give you a pot of £1,000.

If you wish to withdraw the entire pot, a 25 per cent charge will apply to the full £1,000. You’ll have to pay a Government withdrawal charge of £250. This will leave you with £750.

How much is the average home?

According to the latest Land Registry data which relates to March 2024, the typical UK house price is £283,000.

In April 2017 when the Lifetime Isa was launched, it cost £220,094. Some argue that the property price limit on the Lisa should be increased in line with house price rises during that time.

The average price in London already breaches the Lisa limit at £500,000, though all other regions are still under the cap on average.

However, the average home is now more than £450,000 in 27 local authorities which are not within London.

While most are in the South of England, they include cities and large towns such as Oxford, Cambridge, Chichester, Guildford and Winchester.

This is Money has outlined these in the table below, based on Land Registry data for March 2024.

Those needing a larger home, for example because they have children, may also be in danger of breaching the limit. 

This risk could increase as the typical first-time buyer gets older. According to the Office for National Statistics the average first-time buyer is now 36, compared to 32 in 2004.

And separate research from Santander this week revealed that in 2023, around one in five first-time buyers had at least one dependent – up from 10 per cent in 2009.

The average detached home in the UK breaches the cap at £465,000, according to the Land Registry. 

Cheetam added: ‘In some parts of the country the average price paid by a first-time buyer has risen by 42 per cent since the Lisa rules were written. 

‘The average home in London already costs £500,000, and the return of rising prices increases the likelihood of Lisa savers outside the capital falling foul of the £450,000 limit too.’