Warning for savers as 74,000 charged around £11k to withdraw cash from key bank account

THOUSANDS of savers have been issued fines of up to £11,000 for withdrawing their own money from a special bank account.

Fresh figures have revealed that some 74,000 Lifetime ISA (LISA) holders were charged penalties in the 2022-23 year.

The damming discovery comes amid fresh calls for the government to scrap LISA penalties for first-time buyers in the Autumn Budget.

The LISA was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.

The account is tax-free and anyone aged between 18-39 can open one.

You can save up to £4,000 a year and the government will then add a 25% bonus on top.

However, the only way you can make an authorised withdrawal from your LISA is if you are buying a house or you are terminally ill.

If you withdraw for any other reason you are slapped with a 25% fine, which is known as an “unauthorised withdrawal” penalty.

This does not mean you just pay the 25% government bonus back, but you also get a chunk of your own cash taken away as well.

For example, if you start with £800 in your LISA and earn a £200 bonus, you’ll have £1,000 in your account. 

But if you then withdraw the entire amount, you’ll have to pay a 25% charge of £250, leaving you with £750.

Data obtained from HMRC and published by money app Plum showed that in the 2022-23 tax year, 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.

The penalty has become a sore spot for many LISA holders in recent years, especially first-time buyers.

This is because LISA savers have to pay a 6.25% fine if they buy a home costing over £450,000 – a cap which has been frozen for seven years.

However, in some parts of England house prices are higher than the cap.

This includes London, where for example, the average house price in Barnet is £592,597, according to Land Registry figures covering July 2024.

Or outside of London in Cambridge, where the average property value is £487,493.

You can check out the list of the worst-impacted areas below.

Outside London:

• Brentwood – £467,357
• Buckinghamshire – £470,701
• Cambridge – £487,493
• Cotswold – £477,583
• Dacorum – £473,485
• Elmbridge – £679,303
• Epping Forest – £516,585
• Epsom & Ewell – £532,217
• Guildford – £516,489
• Hart – £461,532
• Hertsmere – £489,097
• Mole Valley – £544,223
• Oxford – £475,247
• Reigate & Banstead – £466,545
• Runnymede – £487,634
• Sevenoaks – £500,569
• South Oxfordshire – £496,562
• St Albans – £584,360
• Surrey – £511,001
• Surrey Heath – £452,888
• Tandridge – £519,884
• Three Rivers – £580,751
• Uttlesford – £467,814
• Waverley – £550,427
• Winchester – £491,931
• Windsor & Maidenhead – £572,410
• Woking – £475,214
• Wokingham – £483,259

London:

• Barnet – £592,587
• Brent – £513,133
• Bromley – £503,529
• Camden – £858,303
• City of London – £766,878
• Westminster – £904,355
• Ealing – £549,466
• Enfield – £454,050
• Greenwich – £456,565
• Hackney – £563,111
• Hammersmith & Fulham – £797,032
• Haringey – £571,385
• Harrow – £512,447
• Hillingdon – £459,054
• Hounslow – £451,609
• Islington – £684,844
• Kensington & Chelsea – £1,164,140
• Kingston upon Thames – £546,943
• Lambeth – £535,066
• Lewisham – £460,621

What needs to be done?

Rajan Lakhani, a spokesman for Plum, is urging the government to scrap Lifetime ISA penalties for first-time buyers ahead of the upcoming budget.

He also is asking officials to raise the LISA ceiling should be raised from £450,000 to £600,000.

“The Chancellor has put home ownership at the centre of the Labour Party’s programme for Government,” he said.

He added: “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.”

It comes as the freshly appointment Labour government are set to deliver their first budget this October.

All eyes remain fixed on what Chancellor Rachel Reeves will do to help first-time buyers, who have been bruised by a tough economic climate and rising costs.

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.”

What other LISA pitfalls are there?

There are some other shortcomings to having a Lifetime ISA.

The LISA allowance has remained frozen at £4,000 since the product was first launched in 2017, which is restrictive.

So, savers trying to build up a deposit and save more than the maximum LISA allowance of £4,000 may also want to consider a regular ISA.

You can also only use a LISA for a property if you have never owned one.

This includes a share of inherited property or a home overseas.

Also, if you’re a first-time buyer purchasing with someone else, like a partner or friend, for example, they cannot have owned a property before.

Age is another deterrent for many savers.

If you reached the age of 40 on or before April 6, 2018, you won’t be eligible for a LISA

To read more about whether or not a Lifetime ISA is for you, check out our article here.