First-time buyers saving through Lifetime ISAs are now more likely to face financial penalties than successfully purchase a property, according to the latest HMRC data.
During the 2024-2025 tax year, some 129,200 savers incurred charges for withdrawing funds outside permitted circumstances, while just 87,000 managed to use their savings to buy a home.
The Treasury’s penalty receipts totalled £102million during this period, marking a substantial rise from the £75million collected the year before.
For the 25 heftiest individual charges, the mean penalty climbed to £13,500, compared with £10,600 in 2023-2024. Across all penalised savers, the average charge amounted to roughly £790. Some 1.6 million active accounts remain open nationwide.
The growing disparity between those penalised and those achieving homeownership has sparked intense criticism of how the scheme functions in today’s market.
James Bulman, Director and Financial Planner at Smith & Pinching, told GB News that the scheme has become fundamentally flawed for many aspiring homeowners.
“With regards to LISAs, they’re a complicated one in the sense of most financial advisors won’t look into them unless they have to,” he explained.
Mr Bulman cited a recent Oxford client whose target property exceeded the £450,000 threshold, rendering their savings counterproductive.
The ISA cut has been met with frustration from savers | GETTY
“The property they’re looking at is over £450,000. So they’ve been paying in on this premise of buying this property, and it’s counterproductive because they’d have to buy a lower value property,” he said.
Crucially, exit charges surpass the original tax relief, with penalties applied to the entire withdrawal rather than just the government bonus.
The £450,000 property price ceiling has stood unchanged whilst housing costs have surged dramatically.
Had this cap been adjusted to reflect market movements, it would currently sit at £575,550, according to AJ Bell calculations from February 2025.
Over one in ten local authority areas now have typical property values above the LISA limit
|
GETTYHalifax recently announced that average UK house prices crossed the £300,000 barrier for the first time, hitting £300,077 in January.
Research from Skipton Building Society indicates that over one in ten local authority areas now have typical property values above the LISA limit.
This effectively bars first-time buyers in these locations from using their savings without penalty.
Savers face an effective 6.25 per cent penalty on their hard-earned funds if their desired home breaches the threshold, making alternative savings options increasingly attractive.
A consultation on a replacement savings product is anticipated to commence this year, bringing substantial alterations to the scheme’s structure.
Under proposed reforms, the 25 per cent government bonus would be paid at the point of property purchase completion rather than being added monthly as occurs presently
|
GETTYUnder proposed reforms, the 25 per cent government bonus would be paid at the point of property purchase completion rather than being added monthly as occurs presently.
This change would likely abolish the contentious exit penalties entirely, as there would be no bonus requiring recovery from early withdrawers.
The retirement savings function is expected to be stripped from any successor product altogether.
However, these modifications present a compromise for savers. Receiving the bonus solely upon purchase rather than throughout the saving period would eliminate opportunities to earn compounding interest and investment returns on the government contribution.
This could ultimately produce smaller total savings compared with the existing monthly bonus arrangement.
