Martin Lewis warns MPs of 'serious holes' in Lifetime ISAs as he calls for action on 'unfair' and 'off-putting' first-time buyer fines

Speaking to the House of Commons Treasury Committee during an evidence session on Wednesday 26 February, Martin added that the penalty is also a social inequality issue, with those on the lowest incomes likely to miss out on the benefits because they're typically also the most risk averse. We've more details on the LISA evidence Martin gave below.

LISAs are designed to help people aged 18 to 39 buy their first home or, much less popularly, 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 there are a number of holes in the scheme, which we've been campaigning to fix since January 2023.

Martin Lewis: 'I have a problem with the LISA withdrawal penalty'

Here's what Martin said in full in the video clip above:

Martin Lewis: "I have a problem with it [the 25% Lifetime ISA withdrawal penalty] for first-time buyers buying a house. So what we have is, we have a succession of young people, who are saving in the vehicle they have been encouraged to save in by the state, who are then using, trying to use their savings to buy a first-time property.

"But, due to house price inflation, their property has just tripped above the £450,000 level. And then, not only do they not get the £1,000 a year bonus they were intended to get – which I understand, and it's legitimate, there's a threshold – they are fined by the state effectively 6.25% of their own money in order to withdraw that money to get the cash out. And the problem with that, is not just for the individuals who it affects.

"When I do television programmes on the Lifetime ISA, I have to warn people about that. And when I warn them about that, because you have to have the caveat 'that you should only save in this if you are definitely going to buy a property under £450,000', instantly, we have a huge dropout in the number of people who get it.

"So, the sentiment that that does is very negative. Generally, in every other way, the Lifetime ISA is potentially superior [than the Help to Buy ISA], but not in that way. And that needs to change."

Adding to the point later in the session, Martin said: "The nature of the penalty and the deterrent of the penalty is not just a problem in its own right, it's a social equality and a social opportunity problem because it is a greater deterrent for those from less financially educated backgrounds."

Martin: 'The fact the £450,000 threshold has not been increased is a manifest unfairness'

Our secondary ask is for the £450,000 LISA limit to be raised to catch up with average property price growth and then be index-linked to house prices thereafter. This could even be done on a regional basis.

On this issue, Martin told the Committee: "The argument over the level of the cap is a subsidiary argument to the withdrawal penalty. If you have a withdrawal penalty, then the cap is absolutely crucial. And the fact that we've not increased it [the cap] with average house prices year-on-year is a manifest unfairness that puts people off the product, gives people no transparency and no consistency.

"Now, if we park for that one second and say let us look at a world where, if you're buying your first-time property you pay a 20% penalty – ie, you get your money back if it's above the threshold – then, the cap becomes a secondary measure because, what it doesn't do, is put anybody off."

Martin: 'The age limit should be scrapped'

A LISA can be opened by anyone aged between 18 and 39. On this age limit, Martin said: "Why should a 41-year-old who has never had the opportunity to buy a home not be able to open a Lifetime ISA? Why is there an age limit of 40 for opening a Lifetime ISA?

"I think as people are buying properties at a much older age, I think it is age discrimination, and 'you've got to open it before your 40th birthday' seems wrong to me."

Martin: 'The retirement savings element needs restructuring'

The LISA can also be used to save for retirement, though you can only access these funds at age 60. For more on how this retirement aspect works, see our LISAs guide.

Commenting on the dual aspect of the product, Martin told the Committee: "The pension-linked element or, more accurately, the retirement savings-linked element, is a problem. And it caused, the unintended consequence; there are no major providers who offer Lifetime ISAs. You cannot get it from a high street bank, you cannot get it from any main provider.

"So, you're talking fintech and modern innovative finance organisations. Now, while that is very good in its own right, the lack of availability, the lack of marketing from mainstream financial providers, means it's not had the take-up it should. And the very simple reason they won't do it, is they think they'll be done for mis-selling."

What the other panellists said

Martin was one of three consumer representatives giving evidence on LISAs to the Committee. A second session afterwards saw views given by LISA providers and industry representatives.

Commenting on the withdrawal penalty in Martin's session, founder of financial education business Hoops Finance, Funmi Olufunwa, said: "What really frustrates people, and what they really think is so unfair, is that they end up losing their own money.

"People are doing the right thing, they're doing the things that we've told them to do – they want to save for a property, and they're doing that, and then they feel that the rug has been pulled out from underneath them through no fault of their own because they personally cannot control house prices."

On this point, Michael Johnson, a research fellow and one of the architects behind the LISA scheme, added: "The proposal I put was the withdrawal charge was 20% – in other words, no penalty – and therefore the introduction of the penalty, which of course is implicit, not explicit (and there's great miscommunication around this subject) was an unpleasant surprise when it was launched."

The Committee will now consider the evidence given and decide if it needs to hear anything further. The next step in the process is typically a report with the Committee's final recommendations for the Government.