Warning as 74,000 people charged up to £11,000 to withdraw cash from their own savings

Chancellor Rachel Reeves has been urged to make changes to the Lifetime ISA rules as thousands of savers are being charged up to £11,000 to access their own money.

According to new figures obtained by a Freedom of Information (FOI) request by the money app Plum, around 74,000 people were penalised for accessing their lifetime ISA in the 2022/23 tax year. The LISA was launched in April 2017 and is a savings product which is designed to help people save for either a first home or retirement.

The account is tax-free and anyone aged 18-39 can open one. You can save up to £4,000 a year and the government will then add a 25% bonus on top. Under the current rules, first-time buyers can only purchase a home below £450,000, if the property they buy is more than this - or you pull out the cash for anything other than a home, your retirement, or if you're terminally ill - then you will face a penalty of 25%. Plum notes that this strips out not just the 25% Government bonus but also a chunk of the interest or growth.

As house prices have skyrocketed more and more people have faced these penalties and in 2023-23m the average of the top 25 penalties paid for unauthorised withdrawals was £11,000. The average top 25 withdrawals made sat around £44,000. Around 16,000 savers were forced to hand back £1,000 or more, over 6,100 savers were hit with penalties of £2,000, while 851 potential homebuyers were fined £5,000.

READ MORE: Bank payments could be delayed by up to four days in new crackdown

READ MORE: Cheapest UK supermarket out of Aldi, Tesco, Asda and Lidl for shopping list of 59 items

The average property price in London stands at £536,0521 and there are currently 28 local authorities outside the capital with property price averages above the £450,000 ceiling. These include Brentwood, Essex (£467,357), Sevenoaks, Kent (£500,569) and St Albans, Hertfordshire (£584,360)

The cap for homes has sat at the same level since the LISA was introduced with Plum urging the government to “do the right thing” and raise the ceiling to £600,000. This would be the level the cap would be if the savings scheme was "index-linked".

Rajan Lakhani of smart money app Plum said: "The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded. House prices have risen – but policy has not caught up.

"The Chancellor has put home ownership at the centre of the Labour party’s programme for government. That’s why it makes sense to index-link the Lifetime ISA ceiling from the time of its launch and bring in a new limit closer to £600,000. Young people trying to get a foot on the housing ladder have enough challenges already without having to worry about potentially losing a chunk of their hard-earned savings.”

Martin Lewis, the founder of MoneySavingExpert.com, has also joined the call for an urgent revamp of the rules that apply to LISAs. Martin said that if the cap wasn't to rise, then the penalty should drop from 25% to 20% as this would mean you get back the money you have put in - but you don't get the bonus.

READ MORE: Mango's £50 red cardigan rivals viral H&M version as the ultimate autumn staple