Savers could be facing penalties of up to £11,000 on their Lifetime ISAs, prompting urgent calls for reform of the savings scheme.
Around 74,000 savers were hit with LISA penalties between 2022 and 2023, according to figures.
Savers can withdraw money from a Lifetime ISA without a penalty once they turn 60, or if they use it to buy a property costing up to £450,000. If these rules are breached, savers face a 25 per cent penalty.
This penalty is a particular problem for people trying to buy homes that cost more than the £450,000 limit.
As a result, there have been calls for Labour’s Rachel Reeves to change the rules, with some campaigners asking to increase the property price cap to £600,000.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s clear the Lifetime ISA has huge potential to help people meet their home owning and retirement needs but reform is needed.”
Around 15,977 savers were forced to return £1,000 or more
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Rajan Lakhani, Plum spokesperson said: “The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current LISA rules so young families can realise the dream of home ownership sooner.”
He warned that even losing £1,000-£2,000 can represent a major setback for young couples, equivalent to the cost of a home survey or removal fees.
Around 15,977 savers were forced to return £1,000 or more, while 6,139 faced penalties exceeding £2,000, according to data from Plum.
A further 851 potential homebuyers were hit with penalties over £5,000, with the top 25 penalties averaging £11,000 each.
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Withdrawing cash from an ISA for any other reason, unless someone is terminally ill, can trigger these penalties.
The current £450,000 cap is particularly problematic in London, where average property prices stand at £536,052.
The issue extends beyond the capital, with 28 local authorities outside London exceeding the ceiling, including Essex (£467,357), Kent (£500,569) and Hertfordshire (£584,360).
Lakhani warned: “There are currently dozens of local authorities across the country where the average house price is greater than the £450,000 cap, and that number is only set to rise in the future.”
The total value of withdrawal charges has risen significantly, reaching £75,272,000 in 2023-24, up from £54,328,000 in 2022-23.
While 56,900 people successfully used their LISA to buy their first home in 2023-24, nearly double that number – 99,650 people – made unauthorised withdrawals during the same period.
Some finance experts said the figures from HM Revenue and Customs (HMRC) highlight the need to reform LISAs, which help people to save for their first home or their retirement.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s clear the Lisa has huge potential to help people meet their home owning and retirement needs but reform is needed.”
The Treasury Committee is now seeking evidence on whether the LISA remains an appropriate financial product, nine years after its creation.
This comes as reports suggest Rachel Reeves is also considering scrapping tax-free cash ISAs entirely.
The Labour Chancellor is reportedly under pressure to cut tax relief on cash ISAs to encourage savers towards more volatile investments.
The potential changes could particularly impact older savers, with Jordan Clark from Quilter noting: “Older savers tend to hold significant amounts in cash ISAs. The average ISA value at the end of 2021 to 2022 was around £63,365 in the 65 and over group.”
Anne Fairweather of Hargreaves Lansdown cautioned against changes, stating: “The big barrier to investment is not the ISA framework. We should concentrate on building confidence to invest.”
