The latest Lifetime ISA (LISA) statistics from HM Revenue and Customs (HMRC) shows that 50,800 people made withdrawals from their Lifetime ISA account to purchase a home in 2021/22, an increase of 15,000 on the previous year.
The average withdrawal was £13,192 - an increase of £700 over the past 12 months.
Withdrawals from a LISA for any other reason than to purchase a first home worth £450,000 or less or for retirement are hit with a 25 per cent charge.
However, Hargreaves Lansdown would like to see the UK Government review the £450,000 limit in light of recent house price growth and also reduce the penalty to 20 per cent.
Commenting on the new data, Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “LISAs are playing a vital role in helping people realise their dream of purchasing their first home.
"We saw 50,800 people making LISA withdrawals for this purpose in 2021-22, a massive 15,000 increase on the previous year, however, reform is needed if more people are to be helped.
“We might be seeing early signs of cooling in the housing market, but this comes off the back of a long period of huge house price growth and for many first-time buyers, particularly in the South-East [of England], the current limit of £450,000 for a first-time home is becoming increasingly difficult to manage.
“Those who purchase a home worth more than this risk being penalised and losing not only their hard-earned bonus but also a chunk of their own savings too.”
Helen explained that people saving up to £4,000 per year into a LISA qualify for a 25 per cent UK Government bonus. However, if they withdraw money for a reason other than to purchase a first home worth less than £450,000 or for retirement, they risk a 25 per cent withdrawal penalty.
This means someone saving £4,000 would get a 25 per cent UK Government bonus of £1,000 which gives them a total of £5,000.
If they then got a withdrawal penalty it would be 25 per cent of the £5,000 so they risk a penalty of £1,250.
Helen continued: “We would ask the UK Government to revise the current £450,000 limit in light of house price rises in recent years and also look at reforming the current 25 per cent withdrawal penalty.
“During the pandemic the penalty was reduced to 20 per cent which meant that people withdrawing from their LISA lost the UK Government bonus but kept their savings.
"Reinstating the 20 per cent would be a fair approach.”
To keep up to date with the latest HMRC news, join our Money Saving Scotland Facebook group here, follow Record Money on Twitter here, or subscribe to our twice weekly newsletter here.
