Lifetime Isa penalty: More than 185,000 savers fined for taking their OWN money

More than 185,000 Lifetime Isa savers have been fined for withdrawing their own money, a freedom of information request has revealed.

And the proportion of account holders fined for making these “unauthorized withdrawals” has more than doubled in just three years, according to the application filed by mortgage lender MPowered.

The increase in the number of savers being charged fines is due to rising house prices, according to MPowered, which also analyzed existing data from HM Revenue and Customs.

This is because savers face a charge if they withdraw money from a Lifetime Isa for any reason other than buying a first home costing £450,000 or less, to help fund retirement after age 60 or because they have a terminal disease.

This is classified as an “unauthorized” withdrawal under the plan’s rules, and the saver must pay a penalty equal to 25 percent of the amount withdrawn.

Because this penalty applies to the entire fund and not just the amount the saver paid in, it not only means they lose the 25 per cent government bonus paid on savings of up to £4,000 each year, but also some of their own cash.

As house prices have risen, more people are buying homes over the £450,000 limit and incurring the charge.

The average household in London now exceeds that limit, as does 27 other UK local authorities, including Oxford, Cambridge and Buckinghamshire.

The total amount savers have lost due to withdrawal charges since the Lifetime Isa, also known as Lisa, was launched in 2017 is £127 million, which includes loss of interest, according to MPowered. The average fine paid per saver has been £684.

It found that seven per cent of Lisa savers made an unauthorized withdrawal in 2022-2023, compared to just 3.2 per cent in 2019-20.

MPowered also said that since its launch, only 12 percent of Lisa savers, around 170,000, have successfully used their account to buy a home.

The rest are still saving, with around £4bn held in Lisas by the Government’s latest count in 2022, or withdrawn.

As the Lisas are only for those under 40 and the scheme started in 2017, no account holder has turned 60 yet.

Stuart Cheetham, chief executive of MPowered Mortgages, said: “Lifetime Isas were created to help first-time buyers save to buy a home, but thousands of savers are being unfairly penalized every year for doing precisely this.”

“Lisa’s withdrawal penalties are designed to ensure that savers only use these accounts for what they were designed for – buying a first home or saving for retirement – but the limit on the value of the properties they can be used for it means that the Lisas are increasingly unsuitable for their purpose.’

How do Lisas work?

There are currently 1.06 million Lisa accounts open.

Savers under 40 can open a Lisa and until they reach 50, the Government will pay a £1 bonus for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year they can deposit. in the account. .

Two people buying a house together can use their Isa for a deposit, but the value of the property still must not exceed £450,000.

Because the withdrawal penalty applies to the entire fund, including the bonus, and not just the amount the saver paid, it not only means they lose the 25 percent government bonus, but also some of their own cash. .

An example of how this works from the Government website is as follows:

Assuming no growth, an initial saving of £800 will generate a 25 per cent government bonus of £200 and give you a pot of £1,000.

If you wish to withdraw the entire pot, a 25 per cent charge will be applied to the £1,000 total. You will have to pay a government withdrawal fee of £250. This will leave you with £750.

How much does the average home cost?

According to the latest Land Registry data for March 2024, the typical price of a house in the UK is £283,000.

In April 2017, when the Lifetime Isa was launched, it cost £220,094. Some argue that the property price cap in Lisa should be raised in line with the rise in house prices over that time.

The average price in London is already above Lisa’s limit of £500,000, although all other regions are still below the average limit.

However, the average home now stands at more than £450,000 in 27 local authorities outside London.

While most are in the south of England, they include large cities and towns such as Oxford, Cambridge, Chichester, Guildford and Winchester.

This is Money has described them in the following table, according to data from the Property Registry from March 2023.

Those who need a larger house, for example because they have children, may also be in danger of going over the limit.

This risk could increase as the typical first-time buyer ages. According to the Office for National Statistics, the average first-time buyer is now 36 years old, compared to 32 in 2004.

And separate research from Santander this week revealed that by 2023, around one in five first-time buyers had at least one dependent, up from 10 per cent in 2009.

The average detached house in the UK exceeds the £465,000 limit, according to the Land Registry.

Cheetam added: ‘In some parts of the country, the average price paid by a first-time buyer has increased by 42 per cent since the Lisa rules were written.

“The average home in London already costs £500,000, and the return of rising prices increases the likelihood that Lisa savers outside the capital will also fall short of the £450,000 limit.”