Introduction
HMRC has penalised more than 129,000 Lifetime ISA (LISA) savers in the past year, issuing charges that averaged £789.75 per person. The fines were triggered when savers withdrew money early for reasons outside the scheme’s strict rules.
Lifetime ISAs, designed to help young people buy their first home or save for retirement, carry a punitive 25% withdrawal charge for unauthorised access. This fee not only removes the government bonus but eats into savers’ original contributions.
The latest figures reveal a steep rise in penalties, raising concerns among financial experts that the scheme is failing to support many of the people it was created to help.
Why Savers Are Being Fined
A LISA allows people aged 18–39 to save up to £4,000 a year and receive a 25% government bonus. Withdrawals are permitted only if buying a first home under £450,000, after age 60, or due to terminal illness. Any other withdrawal triggers a 25% penalty on the entire pot.
Because the penalty applies to the full amount, it effectively results in a net loss of 6.25% of savers’ own money, not merely their bonus. Many first-time buyers found themselves fined after choosing homes priced above the £450,000 limit.
Savers have told HMRC they withdrew funds due to unexpected financial hardship, losing jobs, or urgent bills and then felt “further penalised for their misfortune”.
Penalty Charges Hit Record Highs
HMRC data shows LISA penalties totalled £102 million in 2024–25, up from £75 million the previous year. The number of people fined rose to 129,200, a sharp increase from 99,700 in the previous year and far above the 41,700 penalised during the pandemic year of 2020–21.
This surge reflects both larger savings pots and rising numbers of withdrawals, with average penalty charges climbing steadily.
Over the past six years, the Treasury has collected around £213 million in early withdrawal fines, prompting criticism that the product may be too rigid for modern financial pressures.
Calls for Reform Grow
Financial experts say the current penalties are disproportionate and have become increasingly out of step with real-world circumstances. House prices have soared since 2017, yet the LISA property cap has remained frozen at £450,000.
If the cap had risen with inflation, analysts say it would now sit at approximately £604,884, meaning many buyers are unintentionally breaching the rules without realising it.
Industry leaders argue that the rigid penalty system punishes savers for circumstances beyond their control and discourages long-term saving among younger households.
What Martin Lewis Says
Martin Lewis has long supported LISAs for their generous bonuses but repeatedly warned savers about the withdrawal trap. He explains that the maths behind the penalty is “deeply counter-intuitive” because it reduces not only the bonus but also a slice of the original savings.
Lewis cautions that anyone opening a LISA must be absolutely certain they won’t need to dip into the money for emergencies, otherwise the losses can be significant.
While he calls the 25% bonus “fantastic” for those who can use the LISA properly, he continues to push for clearer communication and reforms to protect savers from harsh penalties.
Government Response
The Treasury says it will work with LISA providers to improve communication and ensure savers fully understand the product’s conditions. But MPs on the Treasury Committee remain unconvinced the scheme is serving its intended purpose.
They argue that LISAs’ dual-purpose design covering both houses and retirement may confuse savers and push them into inappropriate financial planning decisions.
With £103 billion invested in adult ISAs last year, experts warn that the government must modernise the LISA structure or risk undermining confidence in long-term saving.
Final Summary
HMRC’s latest figures show a fast-growing number of savers being hit with costly LISA penalties, with many losing hundreds or even thousands due to strict withdrawal rules and outdated property caps. Experts say reform is urgently needed to prevent well-meaning savers from being financially punished.
While LISAs remain powerful tools for building bonuses, critics argue the system is failing to keep pace with inflation, house prices, and real-world financial challenges.
