Some savers charged at least £11,000 to withdraw cash from Lifetime Isas

The Government is being urged to scrap Lifetime Isa 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.

Lifetime Isas (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% for making an unauthorised withdrawal.

Data obtained from HM Revenue & Customs (HMRC) and published by money app Plum showed that in the tax year 2022-23 the average of the top 25 penalties paid for unauthorised withdrawals was £11,000.

The average of the top 25 withdrawals made was £44,000. Figures were rounded to the nearest £1,000.

Some 6,139 savers were hit with penalties of £2,000-plus, while 851 were hit with penalties of £5,000-plus.

The 25% unauthorised withdrawal charge strips out not only the government bonus that comes with Lisas but also removes a chunk of savers’ cash.

While there are multiple reasons savers can be penalised, the £450,000 property purchase cap for first-time buyers has attracted criticism, with house prices having surged in recent years.

In some parts of southern England, average house prices are higher than the cap.

This includes London, where the average house price is more than half a million pounds, with, for example, the average house price in Barnet at £592,597, in Camden at £858,303, in Hackney at £563,111 and in Hammersmith and Fulham at £797,032, according to Land Registry figures covering July 2024.

Outside London, there are some local authority areas where average house prices are also approaching or over the cap, such as Cambridge, where the average property value is £487,493, Chichester at £444,694, Cotswold at £477,583, Dacorum at £473,485, Elmbridge at £679,303, Epsom and Ewell at £532,217, Guildford at £516,489, Hart at £461,532, Hertsmere at £489,097, Mid Sussex at £447,679, Mole Valley at £544,223, Oxford at £475,247, Sevenoaks at £500,569, St Albans at £584,360, Winchester at £491,931, and Windsor and Maidenhead at £572,410.

Figures recently released by HMRC showed the total value of Lisa withdrawal charges hit just over £75.2 million in 2023-24 – nearly 40% higher than the previous year when they totalled £54.3 million.

The total value of withdrawal charges in 2023-24 was £75,272,000, up from £54,328,000 in 2022-23.

“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 Chancellor has put home ownership at the centre of the Labour Party’s programme for Government. ​That’s why​ it makes sense to index-link the Lifetime Isa ceiling from the time of its launch and bring in a new limit closer to £600,000.

“Young people trying to get a foot on the housing ladder have enough challenges already without having to worry about potentially losing a chunk of their hard-earned savings.”

Mr Lakhani added: “The upcoming Budget offers (Chancellor) Rachel Reeves the perfect opportunity to fine-tune the current Lisa rules so young families can realise the dream of home ownership sooner.

“Even losing a sum of £1,000-£2,000 can be a major setback for a young couple shopping for their first home. It represents the cost of a home survey, or your removal fees.

“Buying a first home is a huge decision, and the market has moved significantly since 2017. House prices have risen – but policy has not caught up.

“Moreover, the high financial pressure of renting has made it difficult for people to save for their first homes…

“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.”

A Treasury spokesperson said: “Decisions on tax are made in the round at the Budget.

“Across the vast majority of the country the average price for a first-time home remains below the £450,000 Lifetime Isa 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.”