Savers using a Continuance ISA( LISA) have been advised to tread carefully after HM Revenue and Customs (HMRC) revealed the average penalty for violating cash pullout rules has reached £789.75 in the 2024- 2025 tax year. Some first-time buyers have indeed faced forfeitures beating£ 13,500.
HMRC Penalties Hit LISA Savers
Continuance ISAs, aimed at people aged 18 to 39, are designed to help savers get on the property ladder or plan for withdrawal.
The scheme comes with a 25% government perk on benefits up to £4,000 each time, meaning the state can add up to £1,000 annually to your LISA savings.
Recessions are penalty-free if used to buy a first home, after age 60, or in cases of terminal illness. Any other recessions, still, are hit with a steep 25% charge.
HMRC data shows that 129,200 LISA savers faced penalties in the last duty time, over to 99,700 the time before. The total charges reached £102 million, up from £75 million in 2023- 24.
Some penalties have hit hard, particularly for those withdrawing money for homes over the £450,000 LISA property cap or for unexpected personal reasons.
Lifetime ISA Withdrawal Rules
Financial expert Martin Lewis, who has long supported LISA accounts, has previously highlighted the potential pitfalls. Speaking on his BBC podcast, he warned:
“Now, you might think you’ve got a 25% bonus and a 25% penalty means you break even, but that’s actually not how it works.
If you accumulate £10,000 and then get a £2,500 bonus, your account would show £12,500. But a withdrawal results in a balance of only £9,375. In essence, you’re down by £625 from your initial investment because of the punitive withdrawal fee.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, added: “The 25% government bonus for LISA contributions can really boost people’s savings and help that dream of owning your first home or having a decent retirement feel that bit more real.
But the early exit penalty not only wipes out the government bonus but also takes a chunk of your own savings.”
First-Time Buyers and the £450k Cap
Claire Exley, head of financial advice at Nutmeg, explained: “Whether it is rising house prices which have put properties beyond the LISA house price cap 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.”
There are currently 1.6 million active LISA accounts, with 87,250 savers using their funds to buy a first property in 2024-25, an increase of around 30,500 from the previous tax year. The average withdrawal for a home purchase was £15,782, slightly higher than in 2023-24.
Maximising LISA Savings
Over the six years leading up to April 2024, the Treasury collected roughly £213 million in penalties from 286,000 LISA savers.
Many cited “unforeseen changes in their circumstances” as the reason for withdrawing funds, feeling unfairly penalised for circumstances beyond their control.
With the average UK house price now £272,995, well below the £450,000 LISA house price cap, some experts argue the rules on recessions may no longer match the reality of the moment’s casing request.
The government has pledged to work with LISA providers to ameliorate clarity around the product and its rules.
Avoiding Costly LISA Mistakes
- LISAs are available to those aged 18-39 and offer a 25% government bonus on contributions up to £4,000 per year.
- Withdrawals for first-time home purchases, after age 60, or in terminal illness are penalty-free.
- Any other withdrawals before age 60 incur a 25% penalty, which can reduce the saver’s original money as well as the bonus.
- Check house price limits before using your LISA for a property purchase; exceeding £450,000 triggers penalties.
- LISAs can be a powerful savings tool, but need careful planning to avoid costly mistakes.
