Thousands of savers have faced more than £1,000 penalties after withdrawing their money from their savings accounts.
Britons are warned they face hefty penalty charges for withdrawing money from their Lifetime ISAs (Lisas) for purposes other than buying a home or retirement.
The Government is being urged to scrap Lisa penalties for first-time buyers in the autumn Budget as it emerged some savers are being charged at least £11,000 to withdraw their cash.
Lisas help people to save for their first home – if the property costs £450,000 or less – or their retirement.
Withdrawing cash for any other reason, unless someone is terminally ill, can trigger a penalty. Savers face a charge of 25 per cent for making an unauthorised withdrawal.
Of the 74,000 savers who faced penalties last year, nearly 16,000 paid back more than £1,000, and 851 were fined more than £5,000.
The Lifetime ISA offers a 25 per cent government bonus for first-time buyers
PA
In the 2022-23 tax year, 25 savers were charged at least £11,000 for unauthorised withdrawals worth £44,000, research from savings app Plum highlighted.
The 25 per cent penalty not only removes the Government bonus but also takes 6.25 per cent of the saver’s own money.
This comes after it was revealed that more than 100,000 savers were hit with penalties on Lisas in the year to April, repaying a total of £75million.
Lisas were introduced in 2017 by then-chancellor George Osborne. They can be opened by individuals aged 18 to 39, allowing savings of up to £4,000 per year with a Government bonus of up to £1,000 added.
This penalty has drawn criticism, particularly as house prices have surged in recent years. In many parts of southern England, including London, average house prices now exceed the £450,000 cap, potentially leaving Lisa savers unable to use their funds without incurring significant charges.
In the capital, average house prices exceed £500,000, with boroughs like Camden reaching £858,303. Outside London, several areas approach or surpass the cap, including Cambridge (£487,493), Guildford (£516,489), and St Albans (£584,360).
Rajan Lakhani of Plum said: “These findings show how the current ceiling is shutting people out of the housing market.”
He added: “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.”
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Critics argue the cap no longer accurately reflects first-time buyer property prices, leaving many unable to use their Lisa savings without incurring penalties.
Calls are growing for changes to the Lisa system ahead of the upcoming Budget.
Lakhani urged: “By raising the property price limit to a more equitable £600,000, Rachel Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised.”
He suggested index-linking the Lisa ceiling from its launch to address rising house prices.
Martin Lewis, the money-saving expert has also advocated for changes, confirming Lisas were discussed in a recent meeting with the Chancellor.
However, a Treasury spokesperson stated: “Across the vast majority of the country the average price for a first-time home remains below the £450,000 Lisa cap, and we are committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality.”
The Budget on October 30 may provide clarity on potential Lisa reforms.
