Lifetime Isa savers were “clobbered” with around £102 million of withdrawal charges in 2024/25, according to HM Revenue and Customs (HMRC).
This was an increase from £75.3 million the previous year.
Lifetime Isas, or Lisas, allow people to save for their first home or retirement in the same pot.
They come with a Government bonus, helping to boost pots.
Savers can withdraw money if they are buying a first home worth £450,000 or less, are aged 60 or over, or are terminally ill with fewer than 12 months to live.
A withdrawal charge of 25% may apply if someone withdraws cash or assets for any other reason.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The Lisa has an enormously important role in helping people to save for their first home or retirement.
“However, the latest data shows early exit penalties continue to soar with savers being clobbered with £102 million of early exit charges. This is up from £75 million the previous year and shows the Lisa is a product ripe for reform.
“The 25% government bonus for Lisa contributions can really boost people’s savings and help that dream of owning your first home or having a decent retirement feel that bit more real.
“However, the way the early exit penalty works is that it not only takes away the benefit of the government bonus but also a chunk of your own savings. For someone who has saved hard to try and meet a financial goal it’s a tough lesson to take when they need to tap into that income for unforeseen circumstances and then get hit hard with a penalty.”
Some 87,250 account holders withdrew from their Lisa to purchase a first property in 2024/25, an increase of around 30,500 on the previous tax year.
The average withdrawal for a house purchase in 2024/25 was £15,782 – up by around £857 since 2023/24.
Claire Exley, head of financial advice and guidance at JP Morgan-owned wealth manager Nutmeg, said: “Recent Lisa usage is a mixed picture, to say the least, and will likely fuel calls for reform.
“Property purchases using the Lifetime Isa increased significantly during the 2024/25 tax year, likely driven by first-time buyers keen to beat changes to stamp duty rules at the start of April.
“Whether it is rising house prices which have put properties beyond the Lisa house price cap or a change in life circumstances that means people need the money in their Lisa, more savers are handing over their savings to pay the exit penalty.”
The Treasury Committee previously said it was unconvinced that the Lisa effectively targets people in genuine need of financial support.
MPs warned that the Lisa’s dual-purpose design may be diverting people away from more suitable products and putting part of their savings at risk. The Government has committed to working with Lisa providers to improve the messaging around the product.
The HMRC report said around £103 billion was subscribed to adult Isas in 2023/24, an increase of £31.4 billion compared with 2022/23.
The increase was driven by a jump in cash Isa subscriptions, which grew by £27.9 billion, while stocks and shares Isa subscriptions increased by £3.1 billion.
The report said that during the period: “Increased returns to savings are likely to have increased the attractiveness of Isas as a means to reduce savings income tax liabilities.”
In 2023/24, £1.8 billion was subscribed to Junior Isas, around a third (36.4%) of which was in cash.
Rachael Griffin, a tax and financial planning expert at wealth manager Quilter said: “Higher interest rates have clearly made cash Isas more appealing, offering returns not seen for over a decade.
“But this is a temporary reprieve. Rates have already started to drift lower.
“Savers often risk confusing safety with security, a mistake that can be very costly over time.”
The value of money held in stocks and shares can go down as well as up.
Elsa Littlewood, a private wealth partner at BDO, said: “Against the backdrop of rising interest rates during the year coupled with the ongoing freeze on the personal savings allowance, it’s clear that many people sought out ways to shelter their interest, investment income and capital gains from tax using Isa wrappers.
“There was speculation earlier this year that the Chancellor (Rachel Reeves) would announce a reduction in the annual cash Isa limit from its current £20,000.”
Jason Hollands, managing director of Bestinvest, an online investment platform owned by wealth manager Evelyn Partners, said: “The personal savings allowance, the amount of interest that can be received each year before tax is owed, has withered in real terms, having been frozen since inception in April 2016 at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
“For now, it seems, the Chancellor’s plans to cut the cash Isa allowance have been put on pause but that does not mean reform of Isas is off the table completely for the remainder of this parliament.
“Isas should not be taken for granted given the increasingly painful tax burden in the UK.”
