Research commissioned by HM Revenue & Customs (HMRC) found that 16% of lifetime ISA (LISA) holders had used their account to buy a home within the rules.
29% said the Government bonus was ‘essential’ in helping them buy, while 50% said it was ‘important’, and 21% called it ‘nice to have’.
The majority (87%) felt it was ‘likely’ they would have saved and bought a home without the LISA, with 46% saying it was ‘extremely likely’.
Data found that most LISA holders were aged between 30 and 47.
The group was split evenly between those aged 30 to 35, 36 to 41, and 42 to 47; 62% were male, 36% female, and 2% chose not to say.
Most (79%) identified as White British and around eight in 10 (79%) were working for an employer, with 74% working full-time.
The majority of LISA holders lived in London or the South East (26% and 17%).
Many reported being financially secure, with 38% managing okay and 37% living comfortably.
About 15% said they were just about managing, and 7% found it difficult.
In terms of income, 11% earned over £125,141 annually, placing them in the higher or additional rate tax band.
About 37% earned between £50,271 and £125,140, and 34% earned between £12,571 and £50,270.
A small number (3%) earned up to £12,570, while 2% did not know their income.
Most LISA holders had other savings, with an average of three additional products; only 2% had no other savings.
Nearly half (46%) opened their LISA to save for a first home, while 45% did so to save for retirement or later life.
Less than 10% opened it for both reasons, and 1% couldn’t remember.
The main reasons for opening a LISA were the Government bonus and the tax-free interest.
Almost all (98%) said the Government bonus was ‘important’, with 90% calling it ‘very important’.
Similarly, 92% said the tax-free interest was ‘important’, with 72% considering it ‘very important’.
About 96% of LISA holders said it was ‘easy’ to open, with 70% stating it was ‘very easy’.
Around 89% rated their understanding of the LISA as ‘good’, and 47% as ‘very good’.
Of those who made withdrawals, 87% said the process was ‘easy’.
About 83% would recommend a LISA, with 60% ‘strongly agreeing’.
16% had made unauthorised withdrawals.
Of these, 3% used the funds to buy a property outside the rules, and 8% for other reasons.
The majority (89%) of those who made unauthorised withdrawals understood how their LISA worked, with 46% rating their understanding as ‘very good’.
Most (88%) knew there was a 25% withdrawal charge, and 86% understood they would lose government bonuses and some savings if they withdrew early.
Those who made unauthorised withdrawals for reasons other than buying a house were more likely to be ‘just about managing’ financially.
While only 14% of those yet to withdraw said this, 30% of those who had withdrawn for other reasons did.
Rachael Griffin, tax and financial planning expert at Quilter, said: “New HMRC research released today highlights how confused the purpose of the Lifetime ISA (LISA) has become.
“Nearly half of account holders opened one to save for their first home, while almost as many used it for retirement.
“By attempting to serve two distinct goals, the product risks failing to meet either effectively – echoing concerns raised by the Treasury Committee and many in the industry.”
Griffin added: “While the 25% government bonus is undeniably popular, with 98% of holders saying it was important in their decision to open an account, the product still carries serious flaws.
“The withdrawal penalty continues to punish savers even when they are facing financial strain.
“Many people have faced the difficult battle over the need to save for the future versus the need to pay their bills in recent years, and higher costs have often won.
“This has forced them to stomach the 25% charge to gain access to their money – not only wiping out the government bonus, but some of their own hard-earned savings too.”
She said: “HMRC’s own data shows 86% of those making unauthorised withdrawals knew they would lose both the bonus and some of their savings, but did so anyway, which underlines how desperate people were for access.
“What’s more, the house price cap of £450,000, which has been unchanged since the product first launched in 2017, is increasingly detached from reality in many parts of the country – particularly those living in London and the South East.
“Many who have saved diligently find they cannot use their LISA for the property they need without facing a financial penalty.
“This undermines confidence in the product and adds to its complexity.”
She added: “There have been numerous anecdotes of home buyers being constantly outbid by small sums over the threshold as the other interested party knows that by doing so the other buyer loses their ability to use their LISA effectively tying their hands.
“The profile of LISA holders also raises questions. Nearly half sit in the higher or additional rate tax bands, and most live in London and the South East.
“This is far from a universally accessible savings vehicle and risks benefitting those already more financially secure.”
She said: “For first-time buyers, the LISA has provided genuine help. Nearly a third of those who used it to buy a property said the government bonus was ‘essential’ in making the purchase.
“But the majority admitted they likely would have bought anyway, just with more difficulty, reinforcing the concern that the LISA often diverts existing savings rather than generating new ones.
“Taken together, these findings underline why the LISA should be central to the Treasury’s upcoming ISA consultation.”
She added: “Small tweaks won’t be enough. A fundamental rethink is needed to create simpler, clearer products that genuinely meet people’s savings goals, rather than leaving them penalised or confused.”
