Bank warning after 185,000 Brits fined for withdrawing their own cash

Boyfriend and girlfriend talking and doing home finances together online on a laptop computer in the kitchen.
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Penalties totalling £127 million have landed on the doorsteps of over 185,000 people for withdrawing savings from their own accounts. New figure analysis reveals that Lifetime ISA (LISA) holders dealt with an average fine of approximately £684, which encompassed lost interest.

A freedom of information (FOI) request made to the Government by MPowered Mortgages suggests even more fines may be distributed in the future.

The LISA scheme was introduced in April 2017 as a means to assist first-time homeowners onto the property ladder or to contribute towards a pension pot. Funds withdrawn to purchase qualifying first homes or for retirement are accompanied by a Government boost of 25 per cent. The interest accumulated on said savings is also tax-free - much like other ISA types.

The LISA scheme serves essentially as a replacement for the erstwhile Help To Buy ISA. With potential for an annual saving of up to £4,000, the government offers an additional 25% bonus - an extra £1,000 at no cost to the saver themselves.

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However, the LISA scheme carries a 25 per cent 'unauthorised withdrawal' penalty for funds withdrawn for any other purpose. Purchasing a residence valued over £450,000 also incurs this fine, given that the price cap has remained fixed at this amount for seven years, reports the Mirror. It's important to note that this does not equate to simply returning the governments 25% contribution however.

Paying back on the total sum inclusive of the Government bonus can result in personal loss. For instance, if you accumulated savings of £2,000 and received a 25% bonus taking the total to £2,500, withdrawing money would attract a 25% fee on £2,500; thus £625. Resulting in a net loss of your own £125

One principal issue is the massive surge in average UK house prices since the LISA was brought into operation. In March, as per Land Registry data, a typical UK house price stands at £283,000, in comparison to £220,094 - the cost of an average home when the LISA was launched in April 2017.

Presently, an average home in the capital sits around the £500,000 mark. Research by MPowered discloses that 7% of LISA savers executed an "unauthorised withdrawal" in the year leading up to April 2023, earning an average penalty of £633 each. The proportion of LISA savers making unauthorised withdrawals was recorded at 2.6% in 2018-19.

The amount of savers fined has over doubled in just three years and MPowered's experts warn that increasing house prices could lead thousands more down this problematic path. Official records reveal a mere 12% of LISA savers have successfully purchased a home using their account since its inception. Nearly nine in ten either faced fines for unauthorised withdrawals or didn't utilise their savings.

Martin Lewis, founder of Money Saving Expert (MSE), has petitioned for the LISA limit to increase coherently with house prices.

Stuart Cheetham, CEO of MPowered Mortgages, has criticised the current state of Lifetime ISAs (LISAs), claiming: "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."

He further suggested that instead of reviving past initiatives or adjusting stamp duty, immediate action is needed: "Forget reheating the failed Help to Buy scheme or tinkering with stamp duty, the next Government should act fast to reform the outdated LISA rules. While the LISA withdrawal restrictions are well intentioned, the property price cap needlessly penalises some savers for accessing their own money - it should be index-linked to reflect the rising tide of house prices."