Key Highlights
- HMRC issues £789.75 penalties to ISA users for breaking cash withdrawal rules.
- The average penalty in the 2024-2025 tax year was £789.75, up from £755.70 in 2023-2024.
- 129,200 LISA savers were penalised with an average of £789.75 each last tax year.
- HMRC has collected around £213 million in penalties from 286,000 savers over the past six years.
Introduction to Lifetime ISAs (LISAs)
The Lifetime ISA or LISA is a tax-free savings account introduced by then-chancellor George Osborne in 2017 for individuals aged between 18 and 39. It aims to help people save for their first home or retirement with a government bonus on contributions up to £4,000 per year.
For those who do not use the savings for their intended purposes, such as buying a first home or retiring, they face a 25% penalty charge. This can significantly reduce the potential benefits of using the account, particularly when the government bonus is taken into consideration.
Rising Penalties and Their Impact
According to figures obtained by The Telegraph via Freedom of Information, in the last tax year, savers were penalised with an average charge of £789.75 for breaking withdrawal rules. This is a significant increase from the previous year when the average penalty was £755.70.
Over 129,200 LISA savers faced charges in the 2024-2025 tax year, while only 87,000 used their savings to buy a first home. Experts suggest that this trend highlights the need for reform of the LISAs due to their complexity and potential misalignment with financial goals.
Industry Expert Opinions
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, expressed concern about the early exit penalties. “The Lisa has an enormously important role in helping people save for their first home or retirement,” she stated. However, she noted that the latest data shows a sharp rise in early exit charges with savers facing £102 million of such penalties, up from £75 million the previous year.
These penalties not only eliminate the 25% government bonus but also take away a portion of the saver’s own money. This can be particularly tough for those who have saved hard to meet financial goals and then need to tap into their savings for unforeseen circumstances, only to face significant penalties.
Conclusion
The Need for Reform
The HMRC report indicates that around £103 billion was directed towards adult ISAs in 2023/24, an increase of £31.4 billion compared with the previous year. Despite this growth, the high penalties and complexity of LISAs have raised questions about their effectiveness in achieving their intended purposes.
Industry experts such as Claire Exley from JP Morgan-owned wealth manager Nutmeg highlighted the mixed picture recent LISA usage presents. “Whether it is rising house prices or a change in life circumstances that means people need the money in their LISA, more savers are handing over their savings to pay the exit penalty,” she observed.
The government has committed to working with LISA providers to improve messaging around the product and address these issues. However, as the oldest users of LISAs reach 46 this year, the need for reform remains pressing to ensure that the scheme truly serves its intended purpose without placing undue financial strain on savers.
