Nearly 100,000 savers have been hit with hefty penalties for withdrawing money from their Lifetime ISAs (LISAs) in the 2023/24 tax year.
The total value of withdrawal charges soared to £75.2 million, a 30 per cent increase from the previous year, according to recent HMRC data.
On average, each saver faced a £755 charge for accessing their own funds outside of the permitted reasons.
This surge in penalties highlights the growing financial pressures faced by many Britons.
LISAs, designed to help first-time buyers save for a home or for retirement, impose a 25 per cent penalty on unauthorised withdrawals.
This charge not only reclaims the Government bonus but also takes a portion of the saver’s own money.
The sharp rise in withdrawal charges has sparked calls for urgent reform of the LISA system, with experts arguing it unfairly penalises those forced to dip into their savings during challenging times.
The figures reveal that 99,650 people made unauthorised withdrawals from their LISAs in 2023/24. This resulted in an average penalty of £755 per saver, a significant sum for those already facing financial difficulties.
Rachael Griffin, tax and financial planning expert at Quilter said: “These concerning figures illustrate just how many people continue to face a difficult battle over the need to save for the future versus the need to pay their bills, and higher costs have clearly won as so many have had to stomach the 25 per cent charge to gain access to their money.”
Griffin suggests reducing the penalty from 25 per cent to 20 per cent to ensure only the government bonus is removed, not savers’ own funds.
Other proposed reforms include allowing people to open and contribute to a LISA until age 55, potentially benefiting 1.2 million self-employed households.
These reforms could make LISAs more flexible and encourage long-term saving, particularly for those with variable incomes.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: “The Lifetime ISA is proving hugely useful with almost 57,000 people using one to help them get that all important first step on the housing ladder in 2023/24.
“However, there’s massive room for improvement as around 100,000 people made an unauthorised withdrawal from their LISA during the same period and got clobbered with a withdrawal penalty.
“These have absolutely soared in recent years hitting £75.2m in 2023/24 up almost 40 per cent on the previous year alone. It’s clear the LISA has huge potential to help people meet their home owning and retirement needs but reform is needed.
“The 25 per cent government top up on savings of up to £4,000 per year is a huge incentive to help people save but the corresponding 25 per cent exit penalty not only takes away this bonus but also a chunk of your hard-earned savings.
“This not only acts as a disincentive for those saving for their first home but also those who want to use it to save for their retirement.”
Experts argue that reforming the LISA could encourage more people to save, particularly self-employed individuals with variable incomes.
Reforms would ensure they have the knowledge that they won’t lose any of their own money should they need to access it early in a time of need.
Currently, LISA holders can only withdraw funds without penalty when buying their first home, reaching age 60, or if terminally ill with less than 12 months to live.
The Government explains: “You’ll pay a withdrawal charge of 25 per cent if you withdraw cash or assets for any other reason (also known as making an unauthorised withdrawal). This recovers the Government bonus you received on your original savings.”
