More people are now withdrawing money from Lifetime ISAs than using them to buy a home, according to data that reveals a growing number of savers are being penalised for early access.
The Lifetime ISA (LISA) was launched in 2017 to help first-time buyers save for a deposit, offering a 25% government bonus on contributions up to £4,000 a year. However, anyone withdrawing money for reasons other than buying a first home or retirement faces a 25% penalty charge, effectively clawing back the bonus and some of the original savings.
“More people are withdrawing from Lifetime ISAs than buying homes, with the 25% penalty leaving savers thousands of pounds out of pocket. Campaigners urge reform as regional house prices and hardship force early access.”
Figures show that the number of people making penalty-ridden withdrawals has overtaken the number using the account to purchase a property. Critics say the penalty is too harsh and traps savers who fall on hard times or find that rising house prices make home ownership unaffordable in their area.
One saver told the BBC she lost thousands of pounds from her LISA after needing to access the money during the pandemic. 'I had saved £12,000 and with the bonus it was £15,000, but when I had to withdraw I only got about £11,000 back,' she said. 'It felt like a punishment for trying to do the right thing.'
Regional variations in house prices mean the penalty hits hardest in areas where property is cheapest. In parts of the North of England and Scotland, where average first-time buyer prices are lower, the £450,000 property cap – above which a LISA cannot be used – is less of a constraint. But in London and the South East, even with the bonus, many would-be buyers cannot afford a home and are forced to withdraw at a loss.
The government has been urged to reduce the penalty from 25% to 20%, which would only remove the bonus, or to allow penalty-free withdrawals in cases of hardship. The Treasury said it keeps all policies under review but gave no indication of imminent changes.
What happens next depends on the outcome of the Treasury's ongoing review of the savings landscape. Campaigners are calling for the penalty to be cut or scrapped entirely, especially for those who have seen their circumstances change through no fault of their own.
What This Means For You
For savers using a Lifetime ISA, the key risk is needing to access the money unexpectedly. If you are a homeowner-to-be, the 25% penalty means you could lose not only the government bonus but also some of your own savings. Renters who are struggling with rising rents may be tempted to dip into their LISA, but the penalty makes that a very expensive option.
Young people saving for a first home should be aware that the £450,000 property price cap excludes many homes in expensive areas. If you live in London or the South East, check whether the LISA is the right vehicle for you. Pensioners or those saving for retirement face no penalty if they wait until age 60, but early access is costly.
Ultimately, the LISA remains a useful tool for those who are confident they will buy a home before they are 60 – but for anyone uncertain, the penalty can turn a nest egg into a financial trap.