Lifetime ISA withdrawal penalties: what first-time buyers pay

Lifetime ISA withdrawal penalties catch savers who take money out for the wrong reason, or at the wrong time, and the charge is larger than many expect. According to GOV.UK, a 25% withdrawal charge applies to any unauthorised withdrawal, which means anything other than buying a first home, reaching 60 or terminal illness.

Reports have put the number of savers affected at 45,000. That figure does not appear in the GOV.UK, HMRC-linked or Treasury material this article draws on, so we cannot confirm it. What the official guidance does show is how the charge works and where first-time buyers can trip up.

The Lifetime ISA early withdrawal rules in plain English

A Lifetime ISA lets you save up to £4,000 a year until you are 50, and the government adds a 25% bonus of up to £1,000 a year. You must make your first payment before you turn 40. The £4,000 counts towards your overall ISA allowance, which is £20,000 for the 2026 to 2027 tax year, GOV.UK says.

You can take the money out without charge in three cases: buying your first home, being 60 or over, or being terminally ill with less than 12 months to live. Any other withdrawal, including moving the money to another type of ISA before 60, costs 25% of the amount taken out.

The charge is on the whole amount, bonus included. The government says it recovers the bonus you received and adds an extra 6.25% on top, ignoring interest or growth. That extra slice is why savers can end up with less than they put in.

Who pays more, and who is protected

First-time buyers are protected only if every condition is met. According to GOV.UK, the property must cost £450,000 or less, and you must buy at least 12 months after your first payment into the account. You must also use a conveyancer or solicitor, who is paid directly by the ISA provider, and you must be buying with a mortgage.

You cannot use the savings if the mortgage is a private one from a relative, a spouse or civil partner, or certain in-laws. Missing any of these conditions turns the withdrawal into an unauthorised one, with the 25% charge.

There is a further trap for people who hold a Help to Buy ISA. You can move money from a Help to Buy ISA into a Lifetime ISA, but moving it the other way triggers the 25% charge. If you hold both, you can only use the government bonus from one of them towards your first home.

A worked example with real numbers

GOV.UK gives a simple case. Savings of £800 earn a £200 bonus and create a £1,000 pot. Withdrawing the lot for an unauthorised reason costs £250, leaving £750. That is £50 less than the £800 the saver actually paid in.

Now scale it up. Take a saver who has paid in £8,000 and received £2,000 in bonus, a £10,000 pot with no growth. Suppose the home they want costs slightly over the £450,000 limit. The withdrawal would be unauthorised, the charge would be £2,500, and they would receive £7,500, which is £500 below their own contributions. This is our illustration, not a figure from the government.

Partial withdrawals need care too. To receive £120 in cash, GOV.UK says you must request £160: the 25% charge of £40 is taken first, leaving £120.

The lower rate was a Covid-era measure and ended on 5 April 2021. The 20% figure in the table applies the temporary charge to the same pot to show the difference.

How to avoid Lifetime ISA withdrawal charges

Start with the 12-month rule. Count from the date of your first payment, not from when you opened the account, and check that your completion date falls after that point. Then check the price against the £450,000 limit before you make an offer, and confirm your conveyancer or solicitor will take the funds directly from the provider.

If you need money for something else, consider whether a different account would suit you better. Ordinary ISAs can be accessed at any time without losing tax benefits, though you should check your provider’s terms for any rules or charges, according to GOV.UK. If your ISA is flexible, you can also put back cash taken out during the same tax year without using up your allowance.

If the need for cash is unexpected, the government has no plans to cut the charge. In its response to a petition, which gathered 20,289 signatures, HM Treasury said the charge “protects the Lifetime ISA’s status as a long-term savings product”. It added that other savings products exist for people who “wish to save on a shorter-term basis”.

Your questions answered

How many years can you max out a Lifetime ISA?

You can pay in up to £4,000 a year until you turn 50, and your first payment must come before 40, according to GOV.UK. The number of years therefore depends on when you start. As an illustration, someone who starts at 30 could pay in for around 20 years, earning up to £1,000 of bonus each year, or about £20,000 on £80,000 of contributions, ignoring growth.

What is the Martin Lewis warning on the cash ISA?

None of the sources used for this article contain a Martin Lewis warning about cash ISAs, so we have not reported one. The official guidance says you can hold cash or stocks and shares in a Lifetime ISA, or a mix of both.

Did the government ever cut the withdrawal charge?

Yes, temporarily. The charge fell to 20% for unauthorised withdrawals made between 6 March 2020 and 5 April 2021, so savers lost only the bonus on the amount withdrawn. It returned to 25% on 6 April 2021, and the Treasury said it had no plans to reduce it permanently.