The government has confirmed plans to scrap the withdrawal penalty applied to Lifetime ISA (LISA) accounts, which has cost thousands of UK savers an average of £790. The change is expected to benefit a significant number of first-time buyers who previously faced financial penalties for accessing their own savings.
The decision comes as the Treasury begins consultations on replacing the LISA with a new, more flexible savings product. According to Citywire, the aim is to create an alternative that supports home ownership without punishing savers for withdrawing funds if their circumstances change.
Thousands Hit by Withdrawal Charge Each Year
Under the current rules, Lifetime ISA holders can receive a 25% government bonus (up to £1,000 per year) when saving either for their first home or retirement. However, those withdrawing funds for any other reason are penalised, not only losing the bonus but paying an additional 6.25% charge on the full amount.
According to Citywire, 129,000 savers were penalised under this system in the 2024-25 tax year alone. This translated into an average loss of £790 per person, effectively turning the LISA into a financial trap for those who experienced unforeseen life events. As Rachel Griffin, tax and financial planning expert at Quilter, told Citywire: “Charging people for accessing their own money when their circumstances change has always felt unfair.”
The penalty, originally designed to discourage non-intended withdrawals, has instead been seen by many as unduly punitive. In practice, it disproportionately impacted individuals facing evolving life situations, such as changes in employment, housing needs, or personal relationships. According to a Treasury spokesperson quoted by The Telegraph, the government is now consulting on a new version of the scheme “specifically designed to support first-time buyers and without penalty for withdrawals.”
Industry Calls for Broader Reform
While the removal of the penalty is seen as a step in the right direction, some experts argue that deeper changes are needed to ensure the system works effectively for savers across the UK. Rachel Vahey, head of public policy at AJ Bell, said the upcoming replacement may resemble the now-defunct Help to Buy ISA, which had fewer restrictions on withdrawals.
According to David Hollingworth, associate director at L&C Mortgages, the cap on the value of homes eligible for LISA-funded purchases is also overdue for review. As property prices have risen significantly in many parts of the UK, this cap has limited the product’s usefulness in practice. “It’s overdue a review,” he said, highlighting how many potential buyers are excluded due to regional price disparities.
Financial advisors have also raised concerns about the timing of the government bonus. If, under a new system, bonuses are only paid out at the point of home purchase, savers could miss out on years of investment growth. As Griffin warned, savers will need to understand that they may be giving up future financial returns if bonuses are withheld during the accumulation period.
