Lifetime ISA Penalties Surge to £13,500 as Property Price Cap Stagnates
The Lifetime ISA has been labeled "counterproductive" by financial experts, as UK households are now penalized an average of £13,500 to withdraw their own savings. This sharp increase from £10,600 in the previous year highlights a growing crisis where the scheme's property price cap has failed to keep pace with rising house prices.
Mounting Penalties and Limited Success
During the 2024-2025 tax year, 129,200 savers incurred charges for accessing funds outside permitted circumstances, while only 87,000 successfully used their savings to purchase a home. The mean penalty climbed dramatically, though across all penalized savers, the average charge was approximately £790. Nationwide, about 1.6 million active accounts remain open, underscoring the scheme's widespread use despite its flaws.
Expert Criticism and Design Flaws
James Bulman, Director and Financial Planner at Smith & Pinching, explained the dilemma: "With regards to LISAs, they're a complicated one in the sense that most financial advisors won't look into them unless they have to. The property they're looking at is over £450,000. So they've been paying in on this premise of buying this property, and it's counterproductive because they'd have to buy a lower value property."
Launched in 2017 by then Chancellor George Osborne, Lifetime ISAs aim to help individuals save for their first home or retirement, with government top-ups of up to £1,000 per year. However, the Treasury committee has raised concerns that the dual-purpose design may be diverting people from more suitable savings options.
Calls for Reform and Government Scrutiny
Dame Meg Hillier, Chair of the Treasury committee, emphasized support for the scheme's goals but questioned its effectiveness: "The committee is firmly behind the objectives of the lifetime Isa, which are to help those who need it on to the property ladder and to help people save for retirement from an early age. The question is whether the lifetime Isa is the best way to spend billions of pounds over several years to achieve those goals."
She added that with imminent ISA reforms on the horizon, now is an opportune time to reassess whether this mechanism truly serves those in need. As house prices continue to outstrip the frozen £450,000 cap, savers face increasing financial penalties, prompting urgent calls for policy adjustments to align with current economic realities.
