Lifetime ISAs boom in popularity

Lifetime ISAs have become more popular, with an extra £732 million going into the accounts last year, according to government figures. The account, which gives a 25% government bonus towards your first home or retirement, is proving attractive for many savers.

The latest figures from HMRC show there was a 43% jump in the amount people paid into Lifetime ISAs in 2022/23. The total amount saved in the year hit a record high of £2.4 billion in 2022/23 – almost double the amount being paid into the accounts three years ago. The average amount paid per account has also risen, so more people are paying more money to the accounts.

Lifetime ISAs have the dual purpose of allowing people to save for their first property or to save for retirement and access the money at the age of 60. Each year more people are using the accounts to buy property, with around 57,000 people using their Lifetime ISA to buy a home last year.

On average, people took almost £15,000 out of the accounts to buy a home last year, which has increased by around £1,000 on the previous year. It makes sense that as the accounts have been around longer people are saving more in them, and so making larger withdrawals when they come to buy a house.

In total almost 230,000 people have now used a Lifetime ISA to buy a property since the accounts launched in April 2017, with more than £3 billion withdrawn to buy people’s first properties. That equates to around £13,300 per withdrawal.

Source: HMRC Commentary for Annual savings statistics: September 2024

Exit penalty hit

However, many savers are still being hit with a withdrawal charge on their accounts. If a saver withdraws money before the age of 60 for anything other than buying a first property they will face a government-imposed exit charge on the money of 25%. This is intended to claw back the government bonus but also means savers lose some of their original contribution.

For example, let’s say you’ve contributed £4,000 to your Lifetime ISA and the government added a 25% bonus of £1,000, bringing your total balance to £5,000. If you withdraw the entire £5,000 in an unauthorised withdrawal, you’d pay 25% of it in an exit penalty, equaling £1,250. This means that instead of getting the full £5,000 back, or even the £4,000 you contributed, you would only receive £3,750.

Despite this exit penalty, more savers are withdrawing money from their Lifetime ISA and taking the hit: savers lost more than £75 million in withdrawal charges last year. The total amount paid in withdrawal charges rose by almost 40% on the previous year and is 14 times higher than one year after the accounts launched in 2017.

The average value of these unauthorised withdrawals has hovered around the £3,000 mark since then, apart from a spike during the pandemic when the withdrawal charge was temporarily cut from 25% to 20%. But we’re seeing more individuals make unauthorised withdrawals from their accounts, leading to the spike in charges. There was an increase of almost a third in the number of savers making an unauthorised withdrawal last year, representing about one in eight of all Lifetime ISA savers.

How a Lifetime ISA can shave years off your deposit

Someone who had opened a Lifetime ISA when the accounts were introduced in 2017 and paid in the full £4,000 a year would now have a pot worth just over £50,000, assuming 5% investment growth a year after charges.

Across those eight years they would have contributed £32,000 and benefited from £8,000 in free money from the government. They would have also seen just over £10,000 of investment growth in that time.

If instead you’d saved that same £4,000 a year into a normal stocks and shares ISA over the same timeframe, you’d have contributed the same £32,000 over the period. But you wouldn’t have benefitted from any government bonus and even if your investment returns stayed at the same 5% a year, the returns would be just over £8,000 – as you’re only getting returns on your contributions, not on the government bonus too. At the end of the period, you’d have £10,000 less in your savings pot.

Saving in a Lifetime ISA

Source: AJ Bell

Try our Lifetime ISA calculator to see how much you could save towards your home or retirement.

These articles are for information purposes only and are not a personal recommendation or advice. Tax and LISA rules apply and could change in future.