More than 185,000 Lifetime ISA (LISA) savers have been fined £127m for making unauthorised withdrawals of their own money, with the average fine at £684, including lost interest.
Official data released today shows that, since launch, only 12% of LISA savers have successfully used their account to buy a home. Nearly nine out of ten have either been fined for making an unauthorised withdrawal or haven’t used their savings at all.
With more than £4bn currently held in LISA accounts, a Freedom of Information request by MPowered Mortgages reveals that the proportion of account-holders fined for making unauthorised withdrawals has more than doubled in just three years, warning thousands more could fall into the same trap as house prices rise.
Rishi Sunak said this week that saving a deposit is the biggest challenge first-time buyers face, but it’s clear the LISA scheme is failing far too many of them. MPowered urges the next government to reform “unfit for purpose” LISA rules to stop punishing savers who live in areas with higher property prices.
LISAs were launched in April 2017 to help first-time buyers get on the property ladder or save for a pension. Savers get a 25% government boost when they use the funds to buy a qualifying first home, and like all ISAs, they are a tax-efficient way to save because the interest is tax-free. You can withdraw money from your LISA if you are buying your first home, aged 60 or over, or terminally ill. You’ll pay an unauthorised withdrawal penalty of 25% of the withdrawal amount if you withdraw cash or assets for any other reason.
LISA savers have to pay the fine if they buy a home costing over £450,000 – a cap which has been frozen for seven years. This is also classified as an unauthorised withdrawal penalty.
House prices have risen sharply since the £450,000 limit was introduced. Land Registry data shows that between April 2017 and March 2024, the average UK property jumped in value by 29.3%. Prices paid by first-time buyers soared by 42% in both Wales and North West England, and the average first-time buyer property now costs over £450,000 in four out of five London boroughs.
MPowered’s research reveals that 7% of LISA savers made an unauthorised withdrawal in the year to April 2023, each receiving an average fine of £633. The proportion of savers fined has more than doubled in just three years, and experts warn that thousands more could fall into the same trap as house prices start to rise again.
In March’s Budget, Chancellor Jeremy Hunt ignored financial campaigner Martin Lewis’ pleas to reform the house price cap baked into the LISA rules. MPowered’s Freedom of Information request revealed that more than £4bn is currently held in over a million LISA accounts. More than a quarter of a million new accounts are opened every year, but since launch just 12% of account holders (171,050) have made a penalty-free withdrawal to buy a home – meaning nearly nine out of ten have either made no withdrawals or given up on the scheme and swallowed the penalty for breaking the rules.
MPowered is calling for the next government to urgently overhaul the LISA rules by index-linking the property price limit to take account of rising house prices.
Stuart Cheetham, CEO of mortgage lender MPowered Mortgages, commented: “Lifetime ISAs were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.
“More than 185,000 people have already been fined to the tune of £127m for daring to withdraw their own money.
“The 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 cap on the value of property they can be used for means LISAs are increasingly unfit for purpose.
“In some parts of the country the average price paid by a first-time buyer has risen by 42% since the LISA rules were written. The average home in London already costs £500,000, and the return of rising prices increases the likelihood of LISA savers outside the capital falling foul of the £450,000 limit too.
“Forget reheating the failed Help to Buy scheme or tinkering with stamp duty, the next government should act fast to reform the outdated LISA rules. While the LISA withdrawal restrictions are well-intentioned, the property price cap needlessly penalises some savers for accessing their own money – it should be index-linked to reflect the rising tide of house prices.”
