154,100 Brits hit with average £772 charge for taking money out of Lifetime ISA
Over 150,000 Brits ended up being hit with a penalty from their Lifetime ISA, according to statistics from HMRC.
The accounts are designed to support people saving up for a house, and account holders receive a 25 percent bonus for every deposit they make, up to a maximum of £4,000 per year for a £1,000 bonus from the government.
But there's a catch - account holders have to use the money either to purchase a house worth up to £450,000, or withdraw it after they turn 60.
If you withdraw it for another reason before you turn 60 then you get hit with a 25 percent penalty, effectively meaning that you forfeit that top up bonus you received on the account.
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While the accounts have proven popular and some 99,750 people used their Lifetime ISA to buy a house, equating to £1.5 billion in property purchases, more people ended up being hit with the penalty after needing to withdraw the money earlier.
Unauthorised withdrawals were made by 154,100 people, who lost out on £119 million in the penalties.
The accounts were intended for two purposes, either to help people get onto to the property ladder, or to help them save for retirement by giving them an incentive to leave the money alone until they turn 60.
Rachel Griffin is a tax and financial planning expert at Quilter, and said that while the accounts have proven popular, the fact that so many people have been hit with the penalty is a 'failure of the product'.
“The average unauthorised withdrawal was just £3,088, suggesting many of these are not people emptying large accounts, but savers who started putting money aside for a home before finding their circumstances had changed and now need access to relatively modest amounts of their own savings,” she told Trustnet, adding that it had 'created confusion and undermined confidence'.
Nonetheless the accounts are still popular, with figures indicating that in the tax year for 2024/25 approximately 1.1 million of the accounts were opened up, with people depositing around £2.8 billion into the accounts.
But despite their ongoing popularity, the UK government has now announced plans to scrap the Lifetime ISA account, including a consultation on a replacement in their budget for November 2025.
Details about the product that would replace the Lifetime ISA have not yet been confirmed, aside from that it would be aimed at first time buyers.
However, it has been reported that the replacement will not include the component of the product which also allows to save for retirement.
The government has also clarified that people who already have a Lifetime ISA will still be able to pay into it and will still get the bonuses for it.
Griffin added that the ISAs 'can be highly effective' in helping people to get onto the property ladder, as despite the many penalties there had still been nearly 100,000 successful house purchase using the ISAs.
However, Griffin went on to say that the product which replaces it will need to retain these incentives, but that it 'needs to combine those incentives with greater simplicity and flexibility'.
Kit Roberts