Lifetime ISAs (LISAs) have become a popular way to save for a first home or retirement, offering a 25 per cent Government bonus on contributions.  

However, if you withdraw money for anything other than these specific purposes, you could face penalties from HM Revenue & Customs (HMRC). 

A freedom of information (FOI) request has revealed that in the 2022-23 tax year, the average penalty for the top 25 unauthorised withdrawals was £11,000.  

Over 15,000 savers had to hand back £1,000 or more in penalties, while more than 6,000 paid over £2,000 and 851 paid over £5,000. 

With the total value of LISA penalties reaching over £75 million in 2023-24, up 40 per cent from the previous year, it is clear that many savers are feeling the sting of these charges.  

So, how can you avoid becoming part of these statistics? 

What are the LISA rules? 

The 25 per cent withdrawal penalty is in place to ensure that LISAs are used for their intended purposes: buying a first home (worth £450,000 or less) or saving for retirement, which you can access tax-free from age 60.  

Any other withdrawals, unless due to terminal illness, will incur the charge.  

The penalty removes some of your own savings, making it more imposing than it first appears. 

Plan your savings carefully 

If you are considering using a LISA to buy a first home, it is vital to be aware of the £450,000 property price cap.  

House prices have risen considerably, particularly in the south of England, where many properties exceed this threshold.  

In London, for example, average house prices in areas like Barnet (£592,597), Camden (£858,303), and Hackney (£563,111) are far beyond the cap. 

Even outside the capital, areas such as Cambridge (£487,493), Oxford (£475,247), and Guildford (£516,489) have average property prices above the LISA limit, meaning you could be forced to either buy below the cap or face the penalty if you exceed it. 

Build an emergency fund 

One of the key reasons savers tap into their LISA early is due to unexpected financial pressures, whether that is an emergency or a change in circumstances.  

To avoid being tempted to withdraw from your LISA and incur a penalty, an emergency savings fund should be created that you can access when needed.  

This way, your LISA can remain untouched until it is time to use it for its intended purpose. 

Think long-term with your retirement savings 

If your goal is to use your LISA for retirement savings, make sure it forms part of a broader retirement strategy.  

Since you won’t be able to access the funds without penalty until age 60, other accessible savings or pension schemes should be available to you that allow for flexibility.  

That way, you can keep your LISA intact for the long haul without risking penalties. 

Keep track of your contributions 

You can contribute up to £4,000 per year to a LISA, with a maximum Government bonus of £1,000 annually.  

Staying on top of these limits can help you optimise your savings while making sure you are not relying too heavily on them, which could lead to early withdrawals and penalties. 

Stay informed 

Keep yourself up to date with any changes to LISA rules or allowances.  

The ever-changing property market can affect your plans for using your LISA, so staying informed will help you in the long run and give you a better chance of avoiding penalties.   

If you are looking for advice on how to manage your LISA and avoid penalties, contact our team today for expert guidance.