Increasing numbers of people are having their savings hit with a penalty charge when withdrawing from their Lifetime ISA (LISA).
The LISA is a savings product used to buy your first home or fund your retirement, but official figures show more people made an “unauthorised withdrawal” from their accounts in the past year – where they are hit with a penalty – than used the product to buy a home.
You can save up to £4,000 per year into a Lifetime ISA and the government tops this up with a 25 per cent bonus.
But when savers come to withdraw their money they face a 25 per cent penalty if they are using the money for anything other than retirement, or to buy a first property worth under £450,000.
The key thing about the penalty is that it is 25 per cent of the whole amount withdrawn, not just 25 of the money you originally put in. That means an unauthorised withdrawal can leave you with less than your original contribution.
To give an example of how this works, if you saved £1,000 and so got a £250 bonus, you would have £1,250 total. If you then withdrew it and closed the account, the 25 per cent penalty would be £312.50. So you would get £937.50 back.
Latest figures – which looked at withdrawals for home purchases specifically – revealed in 2025-26, a record 99,750 of people used a LISA to buy their first home, with average withdrawal values sitting at £15,407.
But the number of unauthorised withdrawals also rose to 154,100, with the average withdrawal being £3,088.
Experts suggest the small withdrawal value means people are not emptying large accounts and instead need to access modest amounts of their savings because of a change in circumstances.
At the same time, it shows the £450,000 property purchase limit is no longer reflecting many parts of the housing market as affordability pressures having increased – something many in the industry have criticised.
Steve Watson, director of policy & research at LISA provider, Cushon, said: “Savers shouldn’t face a penalty simply because they need access to their own money.”
The £450,000 cap on the price of properties that can be bought with the LISA has not risen since the launch of the product.
Analysis by AJ Bell last year suggested the cap would now be around £575,550 if it had risen in line with house price growth.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Over 50,000 more people paid a penalty to access their money than successfully used the product to buy a home, which does seem like a failure of the product.”
She added how the latest figures raised questions about whether the design of the LISA was working as intended, with the withdrawal penalty and fixed house price cap being “increasingly difficult to justify”.
Unauthorised withdrawals have been steadily rising since 2018 with the sharpest spike occurring in March 2021 when the government reduced the penalty to 20 per cent during the COVID-19 pandemic.
The government is currently consulting on a new product – the First-Time Buyer ISA – which aims to replace the LISA and remove the withdrawal penalty.
However, Brian Byrnes, director of personal finances at Moneybox, says the LISA needed to be amended rather than swapped for a new product.
Byrnes said: “The best outcome for the millions of current and future LISA savers is to improve the product people already understand and use by raising the house-price cap, reducing the withdrawal penalty from 25 per cent to 20 per cent, and retaining the benefits that help first-time buyers build a deposit. We do not need another ISA adding complexity and taking away value.”
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