FINANCE
Small print, big impact
EXPERT COMMENT
The Lifetime ISA is a fantastic savings and investment product when used correctly, but there’s no question that there are several design aws which need to be ironed out. The Treasury Committee report provides further impetus behind the Government’s plans to reform the ISA market, with the aim of ensuring the UK’s labyrinthine ISA system works better for consumers. AJ Bell has long campaigned for an end to the punitive early withdrawal penalty on Lifetime ISAs. Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the Government-funded bonus. Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach. Likewise, raising the property purchase price limit would be an obvious way to help rst time buyers, who in some parts of the country face a decision between buying a cheaper home outside the area they want to live in, or saving without the help of a Lifetime ISA. In numerous areas average ats and terraced houses, the sorts of properties that might well appeal to aspiring homeowners, now exceed the £450,000 cap.
The Lifetime ISA offers tax-free savings and a Government bonus to help you buy a first home – but read the small print carefully or there could be trouble ahead, warns Kay Hill
the rules could mean a hefty Government “unauthorised withdrawal penalty” of 25%. The Government has collected £213m in these penalties from 286,000 people over the six tax years ending in 2024, with £75m collected in 2023-24 alone, a 39% increase on the previous year. What many people are unaware of, is that the 25% withdrawal penalty means you pay back more than the original 25% bonus, it actually amounts to around 6.25% taken from your original contributions. For example, if you deposit £1,000 into a LISA, you receive a £250 bonus, giving a total of £1,250. If you withdraw the entire £1,250 before the age of 60 and not to buy a first home, you’ll be charged 25% of £1,250, which is £312.50, meaning you’ll only receive £937.50 of your original £1,000. Here are some examples of LISA restrictions to be aware of… PERSONAL ELIGIBILITY Age: You can only open a LISA between the ages of 18 and 39. Once opened, you can pay in and receive the bonus only until you are 50. After that, if you don’t buy a first home, your account is effectively frozen until you can take it out
A Treasury Committee report on the Lifetime ISA (LISA) released this summer showed that over 1.3 million people have an open account and that since it was launched in 2017 , 228,000 people have used LISAs to buy 182,500 homes. However, the report concluded that the LISA is over-complicated, confusing, and may not be “the most effective way in which to spend taxpayers’ money to support first time buyers”. With Chancellor Rachel Reeves threatening reform of ISAs in general, it’s possible that the LISA could be in the firing line – so first time buyers are rushing to open one. At Hargreaves Lansdown, for example, last year was the biggest year ever for LISA openings, with an increase of 24% in the number of people paying into one. Lifetime ISAs certainly offer a sound financial benefit, you can pay in up to £4,000 each year (forming part of the overall £20,000 ISA annual allowance) and the Government pays a 25% bonus. So pay in the full amount and you’ll receive £1,000, in addition to the interest you receive on a cash LISA and possible capital gains on a stocks and shares LISA. However, there are some important bits of small print to note along the way, because failing to follow
Tom Selby, Director of Public Policy, AJ Bell
102 First Time Buyer October/November 2025
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