Around 45,000 Lifetime ISA (LISA) savers were penalised with unauthorised withdrawal charges more than once in 2024–25.
A Freedom of Information (FOI) request submitted by smart money app Plum revealed the figure, which MPs sitting on the Treasury Committee were told HMRC couldn’t produce within their requested timeframe. The omission was highlighted in the Committee’s report published in June last year.
The 45,000 who suffered multiple penalties represented around a third of the 129,200 people penalised in that tax year.
The current Lifetime ISA is designed to help people either save for their first home or save for later life. LISA holders can save or invest a maximum of £4,000 a year and receive a 25% bonus worth up to £1,000 annually up until the age of 50.
However, those who want to withdraw the money before age 60 and aren't buying their first home face a 25% government charge and can end up with less than what they put in despite the government bonus.
For example, a saver putting in £1,000 would receive a bonus of 25% making their pot worth £1,250. But if they withdrew that £1,250 in cash they would face a penalty of 25% of the total bonus-inclusive withdrawal, losing £312.50. This would leave them with £937.50 - £62.50 worse off than when they started.
Figures released to Plum revealed the average saver penalised more than once in 2024/25 lost £760 cumulatively that year. 3,970 savers incurred combined fines in excess of £2,000. In the most severe cases - the top 25 persons incurring multiple fines - average combined penalties per person were in excess of £11,000.
The government now plans to replace the Lifetime ISA with a new First Time Buyer ISA. Although the new wrapper will aim to strip back complexity and penalties, full details of how this will work in practice are yet to be revealed.
The new product is expected to remove the option of using funds for retirement and add the bonus only when you are ready to buy a home so you don’t get back less than what you deposit. It will also eliminate cash withdrawal penalties which many would-be first-time buyers may have felt necessary to cover day-to-day living expenses. However, people won’t be able to accrue interest or investment growth on their government bonus, as it arrives at the point of purchase rather than beforehand.
Annual savings limits and price caps have yet to be announced. Plum has called on the government to increase the current price cap to reflect price inflation, and believes the annual subscription limit should be increased to around £600,000.
Rajan Lakhani, personal finance Expert at Plum, commented: “It is noteworthy that this exact data was requested by a parliamentary committee, but MPs were told it could not be produced in time. And yet a Freedom of Information request has surfaced it in a few short weeks.
“What the data shows will anger many and focus minds on ensuring the new First-Time Buyer ISA is fit for purpose.
“More than 45,000 people have been stung with multiple penalties in the space of a single year when they’ve been doing the right thing and using a LISA to help their homeownership dreams become a reality. This includes more than 11,000 savers who lost more than £1,000.
“These are significant sums of money for first-time buyers who already face considerable obstacles to getting a foot on the housing ladder.
“First-time buyers in London and the South East face the most acute affordability challenges in the country. The effect of the existing Lifetime ISA - frozen at £450,000 for nine years now - has been to shut many out of the housing market altogether.
“The launch of the First Time Buyer ISA presents the government with a perfect opportunity to show it's serious about democratising access to the housing ladder by raising the existing cap to around £600,000 in line with price growth.
“But better still would be simply reforming the existing Lifetime ISA to make these adjustments rather than introduce another ISA product, alongside reducing the withdrawal penalty to 20% so savers don’t get less money back than they originally deposited.”
