Government fails to act on Lifetime ISA fines – but Martin Lewis says there's still a chance to tackle the problem
The Government has failed to commit to urgently addressing "serious holes" in Lifetime ISAs (LISAs) following calls for reform from a group of cross-party MPs. But MoneySavingExpert.com (MSE) founder Martin Lewis says the upcoming Budget in November could still be an opportunity for the Government to scrap the scheme's fine on first-time buyers purchasing homes above the LISA's £450,000 cap.
Responding to the Treasury Select Committee's report on LISAs published in June, the Government today (Thursday 11 September) said it believes the withdrawal charge "ensures that the LISA has been used for its intended purposes: homeownership for first-time buyers or later life savings".
It added that the £450,000 property price cap "supports most first-time buyers across the UK, including those households who may find it difficult to get onto the property ladder".
This is despite the Government's own new research showing that the withdrawal fine – which sees first-time buyers lose some of their own savings when buying a home above the £450,000 cap – puts one in five people off opening a LISA.
Martin Lewis: 'If we're going to have a product like this, we should make sure it's working'
Speaking on BBC Radio 5 Live on Thursday 11 September, MoneySavingExpert.com founder Martin Lewis argued there was still an opportunity for the Government to address the problems with the Lifetime ISA in the upcoming Budget on 24 November 2025. He explained:
In my view, Lifetime ISAs are a brilliant, brittle, and broken product.
Let's start with the basics: a Lifetime ISA is a product you can open aged 18 to 39. When you save in it – you can put up to £4,000 a year in it – if you use it to buy a qualifying first-time property, you get a bonus of 25%. That's £1,000 a year free money, or state-funded money, that you get towards your first-time deposit. If it works for you, it's unbeatable and brilliant.
The real problem on the housing element is you have to be buying a property under £450,000, which is fine for most of the country – but people in the southeast of England struggle.
And the really big problem is that if you take the money out to use for a property, and it isn't a qualifying property – let's say it's £451,000 – you have to pay a fine to the Government. A fine, effectively, of 6.25% of your money. So you've saved £10,000, they want £625. You don't get back all your money, never mind not getting the bonus.
Now, I think that is a perverse incentive. It puts people off from saving in the first place, even people it won't affect, because they are scared of that withdrawal penalty.
And my argument is that what should happen is if you're buying the property, either you get the bonus or you effectively don't get a penalty, you can take your money out if it's being used towards a first-time property. Taking it out for other reasons, then they can charge you the penalty because it was never meant to be [used for] that.
For all those young people who are getting Lifetime ISA, you just have to make sure you understand it. It could be really lucrative – I've had so many people who've had £1,000s on the Lifetime ISA.
You know, two of them have saved together for three or four years, and have got £3,000 or £4,000 each towards their first-time deposit – great.
I've also had loads of complaints from people who've been absolutely stuffed by it, and it seems to me if we're going to have a product like that, we should make sure it's working.
What the Government said in more detail
Responding to the Committee's key recommendations, the Government...
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Committed to "work with industry on ways in which it could improve its messaging". This centres around the Committee's recommendation that the Government or LISA providers should explain the merits of using a LISA for retirement at the point that savers purchase a property using the scheme.
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Said that it "keeps all aspects of the LISA policy under review and carefully considers all representations received". This specifically refers to the Committee's recommendation to consider whether the LISA has a future in its present form.
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Rebuffed calls from the Committee to exclude LISA savings when means-testing people for Universal Credit – as it does with other pension products. Commenting on this, the Government argued that the LISA "is a savings product" and that Universal Credit is "there to support people who do not have sufficient resources available to meet their basic needs". The Government added: "people with substantial capital should take responsibility for their own day-to-day support".
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Agreed to consider including Universal Credit risk warnings in the "future development of the policy". The Government said it would work with industry and other Government departments to improve the messaging about the implications of savings and investments on Universal Credit entitlement.
Emma Reynolds MP – Economic Secretary to the Treasury at the time the response was written – added: "The Government recognises the importance of the LISA in supporting people to achieve the aspiration of homeownership, or to build up savings for later life."
Treasury Committee chair: 'I do not believe the Government has gone far enough'
Commenting on the response, chair of the Treasury Select Committee, Dame Meg Hillier MP said: "The Government has taken some steps towards improving the LISA, but I do not believe it has gone far enough. The LISA is a confused product that requires reform."
She added: "The Government has an opportunity at the Budget to think again on the LISA for would-be first-time buyers and those saving for retirement alike."
LISAs are still beneficial for many
LISAs are designed to help people aged 18 to 39 buy their first home or to save for retirement. Savers get a 25% Government boost when they use the funds to buy a qualifying first home. They're a powerful product – still beneficial to many – which can give a huge boost to first-time buyers' savings.
But the scheme's £450,000 house price limit has remained frozen since it launched in 2017, despite house prices rising significantly since then. This has left some first-time buyers unable to find a suitable property under the limit, and savers buying a home that no longer qualifies are then effectively charged a 6.25% penalty on their own money when withdrawing – something we've been campaigning to fix since January 2023.
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