Millions of Britons have opened a Lifetime ISA in the hope of getting onto the housing ladder, but many are instead finding themselves hit with hefty penalties for accessing their own money.
Some savers have lost more than £10,000 after making withdrawals, while more people are now being penalised by the scheme than using it to buy a home.
Freedom of Information data obtained by GB News shows the most severe cases involved average penalties of £10,600 on withdrawals of around £42,300.
Nearly 1,000 savers were charged exactly £1,000 for making an unauthorised withdrawal, while 130 faced penalties of £2,000. More than 1,300 people lost £5,000 or more.
Unlike many savings products, the Lifetime ISA withdrawal charge does not just remove the Government bonus. It can also eat into savers' own money, leaving some with less than they originally paid in.
Critically, Treasury figures show more Lifetime ISA holders have lost part of their original savings through withdrawal charges than have successfully used the product to purchase a property.
The Government is now consulting on whether the Lifetime ISA should be scrapped altogether amid concerns the scheme is failing many of the people it was designed to help.
Unauthorised withdrawal charges have risen steadily in recent years, reaching eight per cent of all Lifetime ISA accounts opened in 2024/25. Provider data also shows thousands of savers are making multiple unauthorised withdrawals.
A Treasury Select Committee report published in 2025 concluded that the Lifetime ISA's design was fundamentally flawed.
MPs said the product's dual purpose of helping people save for both a first home and retirement risked confusing consumers, while the withdrawal penalty often caught people out when their circumstances changed unexpectedly.
Customers can deposit up to their annual ISA limit of £20,000 | GETTYResearch carried out by HMRC found awareness of the withdrawal rules remained low among account holders. Those making unauthorised withdrawals frequently cited financial hardship, including unemployment and the need to repay debt.
Despite the concerns, 314,600 savers had used a Lifetime ISA to buy their first home by the end of the 2024/25 tax year.
The Treasury has proposed a new First Time Buyer ISA to replace the existing product, though crucial details remain absent from the consultation document.
The Government has not confirmed what subscription limits, property price caps or government bonus levels will apply to the new savings vehicle.
Existing Lifetime ISA holders will be permitted to continue saving into their accounts under current rules indefinitely
| GETTYExisting Lifetime ISA holders will be permitted to continue saving into their accounts under current rules indefinitely. However, transfers from a LISA to the new FTB ISA will not be allowed.
Both products may be used towards the same property purchase, potentially requiring aspiring homeowners to manage two separate accounts simultaneously.
The proposed system would pay the Government bonus only upon completion of a first home purchase, rather than adding it to savings annually as the current LISA does.
Rachel Vahey, Head of Public Policy at AJ Bell, said the consultation "gives us the broad shape of the new 'First Time Buyer ISA,' but leaves us guessing on some of the most important aspects."
Under the current LISA, someone contributing £4,000 annually for five years would accumulate £28,165 assuming four per cent growth
| GETTYShe noted that shifting away from an upfront bonus would simplify the system by eliminating the need to reclaim funds through withdrawal charges when savings are used differently.
However, Ms Vahey warned this approach carries drawbacks. Under the current LISA, someone contributing £4,000 annually for five years would accumulate £28,165 assuming four per cent growth, compared to just £27,532 under the proposed FTB ISA with identical terms.
The Treasury has remained notably silent on provisions for self-employed workers saving for retirement, leaving thousands without workplace pensions facing uncertainty about future flexible savings options.