The average amount hopeful homebuyers were fined up to 2022 was £684, including the loss of their accumulated interest, according to a study by MPowered Mortgages.

Around £4bn sits in the accounts that were introduced in 2017 to help people aged between 18 and 39 years old get on to the property ladder or to boost their pension pot. See the Lifetime ISA guide from YourMoney.com – Mortgage Solutions‘ sister title – for more information.

The scheme boasts a bonus from the government of 25% every year up to the age of 50, meaning if savers stash away £4,000 a year, a further £1,000 gets added to the kitty.

Savers have to use the funds to either buy their first home up to a maximum value of £450,000 or use it for retirement income, with access allowed from the age of 60.

But if a withdrawal takes place outside of these circumstances – except if you’re diagnosed with a terminal illness with less than 12 months to live – then you’d be hit with a whopping 25% penalty.

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While this sounds like the government is just clawing back its bonus, the 25% charge is applied on the whole amount so it eats into your contributions.

As an example, someone with £4,000 saved, with the £1,000 government bonus would face a penalty of £1,250 for early access.

The penalty also applies to anyone who wants to access their cash within 12 months of opening a LISA product.

And should you buy a property valued above £450,000, you’ll also get back less than you put into the scheme.

A major criticism of the LISA has been on the house price cap that has remained for seven years since the scheme’s inception. During that time, house prices have continued to rise, particularly in London, where the average property price sets you back £500,000.

However, just 12% of those who have invested in the scheme have gone on to purchase a home, and nine in 10 have either given up on the scheme and taken the financial hit of a fine or not made any withdrawals at all.

It’s an issue that has grown of late, with the number of ‘unauthorised withdrawals’ by savers doubling to 74,650 in the three years up to 2023.

 

‘Lifetime ISAs unfit for purpose’

Stuart Cheetham, CEO of MPowered Mortgages, described the penalties slapped on Lifetime ISAs as unfair and called for whichever party wins the general election to move the house price cap in line with average house prices.

Cheetham said: “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 on rising prices increases the likelihood of LISA savers outside the capital falling foul of the £450,000 limit too.”

Chancellor Jeremy Hunt hinted at reforms to the withdrawal rules ahead of the Budget in March, but no plans were laid out in his speech.

Cheetham believes change is needed as soon as possible.

He added: “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.”