Lifetime ISA savers hit with ‘unfair’ £127m fine for cash withdrawals

More than 185,000 Lifetime ISA (LISA) savers have been fined a total of £127 million for withdrawing money from their accounts, research reveals.

The average amount of fines that hopeful homebuyers faced up to 2022 was £684, including the loss of their accrued interest, according to research by MPowered Mortgages.

Around £4 billion is in the accounts which were introduced in 2017 to help people aged 18 to 39 move into home ownership or boost their pension pot.

The scheme benefits from a 25% government bonus each year, and if £4,000 is added during the year, a further £1,000 is added to the kitty.

Savers had to use the funds to either buy their first home up to a maximum of £450,000, or withdraw it when they were over 60. But if a withdrawal took place outside of these circumstances, unless you were terminally ill, then you would be hit with a whopping 25% penalty.

The fine would also apply if you buy a property worth more than £450,000, a cap which has remained for seven years, but during which house prices have continued to rise. This is a particular problem in London, where the average house price will set you back £500,000.

However, only 12% of those who invested in the program bought a home, and nine in ten either opted out of the program and suffered the financial shock of a fine, or made no withdrawals at all.

It’s a problem that has worsened in recent times, with the number of “unauthorized withdrawals” made by savers doubling to 74,650 in the three years to 2023.

“Lifetime ISAs unfit for purpose”

Stuart Cheetham, CEO of MPowered Mortgages, called sanctions on lifetime ISAs unfair and called on the party that wins the general election to align the house price cap with average house prices.

Cheetham said: “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 asset value cap for which they can be used means that LISAs are increasingly used. unfit for its use.

“In some parts of the country, the average price paid by a first-time buyer has increased by 42% since the LISA rules were written. The average house in London already costs £500,000, and the return on investment from rising prices increases the likelihood that LISA savers outside the capital will also exceed the £450,000 limit.

Chancellor Jeremy Hunt hinted at reforms to the withdrawal rules ahead of the March Budget, but no plans were outlined in his speech.

Cheetham believes change is needed sooner rather than later.

He added: “Forget reheating the failed Help to Buy scheme or tinkering with stamp duty, the next government should act quickly to reform the outdated LISA rules.

“While the LISA withdrawal restrictions are well-intentioned, the house price cap unnecessarily penalizes some savers accessing their own money – it should be indexed to reflect the rising tide of house prices. »