Lifetime ISA savers fined ‘unfair’ £127m for accessing THEIR OWN money

More than 185,000 Lifetime ISA (LISA) savers have been fined a total of £127 million for withdrawing money from their accounts, data 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. See YourMoney.com Lifetime ISA Guide for more information.

The scheme benefits from a 25% government bonus each year until the age of 50, meaning if savers put aside £4,000 a year, an extra £1,000 is added to the pot.

Savers must use the funds either to buy their first home up to a maximum value of £450,000 or to use as retirement income, with access allowed from the age of 60.

But if a withdrawal occurs outside of these circumstances – unless you are diagnosed with a terminal illness with less than 12 months to live – then you will be hit with a whopping 25% penalty.

Although it seems like the government is just clawing back their bonus, the 25% fee is applied to the entire amount and therefore eats into your contributions.

As an example, someone who saved £4,000 and received the government bonus of £1,000 will be charged a penalty of £1,250 for early access.

The penalty also applies to anyone wanting to access their money within 12 months of opening a LISA product.

And if you buy a property worth more than £450,000, you’ll also get back less than you invested in the scheme.

A major criticism of LISA concerns the cap on property prices which has remained in effect for seven years since the program’s inception. During this time, house prices have continued to rise, particularly 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. »