ISA warning as more than 185,000 savers charged for taking out their own money

The number of people expecting fines could rise in future as house prices continue to rise, according to analysis from the mortgage lender MPowered Mortgages, which submitted a freedom of information (FOI) request to the Government.

Savers get a 25 per cent Government boost when they open a LISA which can be used towards the cost of their first home or for retirement.

People can save up to £4,000 a year and the Government will then an extra £1,000 for free.

If people withdraw the cash for any other reason, they face a 25 per cent “unauthorised withdrawal” penalty for the withdrawal amount.

LISA savers will also have to pay a penalty if they buy a home costing over £450,000 – a cap which has been frozen for seven years.

The rise in savers charged the penalties is down to rising house prices according to MPowered, which also analysed existing data from HM Revenue and Customs.

Saves are charged a penalty equal to 25 per cent of the amount taken out.

The fine they are charged applies to the whole pot and not just the amount the saver paid in.

Those affected will lose not only the 25 per cent Government bonus paid on savings but also some of their own cash.

As house prices increase, people find themselves having to go for homes that breach the £450,000 limit and incurring the charge.

The average home in London now exceeds that limit, as well as in 27 other local authorities around the UK including Oxford, Cambridge and Buckinghamshire.

The total amount savers have lost to withdrawal charges since 2017 is £127million, which includes lost interest, according to MPowered. The average penalty paid per saver has been £684.

Seven per cent of LISA savers made an unauthorised withdrawal in 2022-2023, it found, compared to only 3.2 per cent in 2019-20.

MPowered also said that since launch, just 12 per cent of Lisa savers, around 170,000, have successfully used their account to buy a home.

The rest are either still saving, with around £4billion held in LISAs at the Government's last count in 2022, or have withdrawn it.

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Stuart Cheetham, CEO of MPowered Mortgages, said: "Lifetime Isas were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.

"The Lisa withdrawal penalties are designed to ensure savers only use these accounts for what they are designed for - buying a first home or saving for retirement - but the cap on the value of property they can be used for means Lisas are increasingly unfit for purpose."