Rachel Reeves urged to ‘end ISA penalties’ as savers hit with £11k fines on withdrawals

Chancellor is being urged to scrap Lifetime penalties in the upcoming Autumn Budget as it emerged thousands of first-time buyers have been penalty fees to withdraw their cash.

Lifetime ISAs (LISAs) help people to save for their first home – if the costs £450,000 or less – or their retirement. The Government adds a 25 percent bonus to the annually, up to a maximum of £1,000 per year.

However, withdrawing cash for any other reason, unless someone is terminally ill, can trigger a penalty. Savers face a charge of 25 percent for making an unauthorised withdrawal.

Data obtained from HM Revenue & Customs () 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.

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

Plum’s Rajan Lakhani, commented: “These findings show how the current ceiling is shutting people out of the housing market. 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 homeownership 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.”

He added: “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.”

Data released to Plum by under Freedom of Information (FOI) rules shows that around 74,000 savers were hit with penalties in 2022/23, including 15,977 who were forced to hand back £1,000 or more.

Some 6,139 savers were hit with penalties of more than £2,000 while 851 potential homebuyers were fined more than £5,000.

While buyers in London, where average property prices stand at £536,052, are particularly exposed to the LISA cap, there are currently 28 local authorities outside the capital with averages above the £450,000 ceiling.

These include Brentwood, Essex (£467,357), Sevenoaks, Kent (£500,569) and St Albans, Hertfordshire (£584,360).

Plum said if the purchase limit had been index-linked in 2017 when LISAs were first launched, the cap would now stand at roughly £583,000.

Mr Lakhani continued: “The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded.

“The upcoming budget offers 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 to £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.”

He added: “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.”

Chancellor Rachel Reeves will unveil the Autumn Budget on Wednesday, October 30.