HMRC has collected £56 million from the personal deposits of 130,000 Lifetime ISA (Lisa) account holders who breached withdrawal rules, with total penalty revenue exceeding £315 million since the product's introduction. The 25 per cent charge, applied to any non-qualifying withdrawal, has been described by industry experts as a fundamental design flaw that punishes savers.
The Lisa, a UK government-backed individual savings account for those aged 18 to 39, offers a 25 per cent bonus on contributions up to £4,000 per tax year, intended to help save for a first home or retirement. However, withdrawals are only permitted without penalty for a first-home purchase, terminal illness, or upon reaching age 60. Any other withdrawal triggers the 25 per cent charge on the entire pot value.
Effective penalty on original deposits
According to analysis by The Telegraph, because the 25 per cent charge is applied to the total pot (including the government bonus), the effective penalty on a saver's original cash deposits is 6.25 per cent. Since 2018, HMRC has collected more than £315 million in total Lisa withdrawal charges, with £56 million of that sum taken directly from account holders' own contributions.
The number of penalised savers has risen sharply, from 99,700 in the previous year to 130,000 in the most recent year. There are currently 1.6 million active Lisa accounts in the UK.
Industry criticism and calls for reform
Tom Selby, of investment platform AJ Bell, called the penalty “the biggest flaw in the product design.” He said: “Frustratingly, it could be easily fixed by reducing the overall withdrawal charge from 25 per cent to 20 per cent. The fact this penalty is netting the Treasury a tidy sum every year is undoubtedly a factor in their belligerence on this issue.”
Luke Kosky, of trading platform Freetrade, added: “We have a failed product that we desperately need to reinvent. Punishing people for using a product that promised to be beneficial is a terrifying message for those saving for the future.”
Government consultation on replacement FTB ISA
The government has launched a consultation on a new First Time Buyer (FTB) ISA to replace Lifetime ISAs. The new product will be exclusively for first-time buyers, not pensions, and existing Lisas will remain open until the transition, continuing indefinitely if opened in time. Property prices will be capped, contributions will receive a bonus, and both cash and stocks and shares versions will be available. Help to Buy (H2B) ISAs can be transferred into the new FTB ISA.
Consumer champion Martin Lewis commented: “In essence, it looks far more like the H2B ISA used to be, except you can put in lump sums, and the bonus comes at exchange not completion.” He added: “The consultation closes mid-August – my guess is this'd probably come in the next Budget for April 2027 (but who knows – it could be a different Chancellor before then).” The consultation period ends in mid-August, with potential implementation in the next Budget, possibly for April 2027.
