Key Friday £3,088 alert over ISA mistake as HMRC gives update

Key Friday £3,088 alert over ISA mistake as HMRC gives update New figures from HMRC show that 154,100 people made unauthorised withdrawals A major alert has been issued to people with one type of ISA - who lost an average of £3,088 but making a withdrawal mistake. A Lifetime ISA (LISA) is a UK tax-free savings or investment account that gives a person a 25% government bonus to help you buy their first home or save for retirement. However if people take the money out too early, they lose all their bonuses. New figures from HMRC show that 154,100 people made unauthorised withdrawals from their lifetime ISAs (LISAs) in 2025-26. Each saver lost an average of £3,088, according to the figures. People will face unauthorised withdrawal charges if they take their money out of their LISAs for reasons other than buying a first home, retirement or being terminally ill with less than a year to live. Sarah Coles, head of personal finance at AJ Bell, warned people to check if LISAs were right for them before committing, and described the penalty as “horrible”. She said: “Don’t end up making unauthorised withdrawals that land you with a punitive charge. During the year, £119m was lost to exit charges. It shows how many people either don’t fully understand the rules or are forced to raid their savings in an emergency.” People must be aged 18 to 39 to open a new LISA. They can save up to £4,000 each tax year. This amount counts toward your total £20,000 annual ISA limit. The government adds a 25% bonus to deposits, up to a maximum of £1,000 per year. The HMRC report said that nearly 100,000 people withdrew from their LISA to buy a first home - an increase of 13,050 on the previous year. That’s a good way of saving for many people - but buying the wrong first home, in particular parts of the country, could end up costing you. Martin Lewis has warned that Lifetime ISAs (LISAs) are expected to be replaced by a new First-Time Buyer ISA around 2028, advising anyone aged 18 to 39 to open a LISA with just £1 now to lock in the facility and start the clock Personal finance expert Mr Lewis has consistently campaigned for a change to the LISA penalty rules, so that people buying first homes in more expensive areas of the country do not lose out. In an explanation on his website, he says: “The real problem on the housing element is you have to be buying a property under £450,000, which is fine for most of the country - but people in the southeast of England struggle. “And the really big problem is that if you take the money out to use for a property, and it isn’t a qualifying property - let’s say it’s £451,000 - you have to pay a fine to the government. “A fine, effectively, of 6.25% of your money. So you’ve saved £10,000, they want £625. You don’t get back all your money, never mind not getting the bonus.” Lewis argues that’s a “perverse incentive” which puts people off saving in the first place. “If we’re going to have a product like that, we should make sure it’s working,” he says. From April 2028, the Government is expected to introduce a redesigned Lifetime ISA focused solely on helping first-time buyers, removing its existing role as a dual-purpose vehicle for both first-time buyers and those saving for retirement. Maike Currie, VP for Personal Finance at PensionBee, said: “While the original design of the Lifetime ISA blurred the line between property and pension saving, something which should never have happened, the LISA has become an important retirement savings product for a growing cohort of savers. “Many self-employed workers, who lack access to workplace pensions, have turned to LISAs to build long-term savings, making the most of the government bonus. Meanwhile homeowners in their 30s and early 40s, who managed to open a LISA before age 40, have continued contributing to LISAs, using them as a tax-efficient alternative or additional savings vehicle. “Removing the retirement element without providing a clear plan for those who have used the LISA in this way, risks the LISA becoming a ‘zombie product’ and leaving these savers out in the cold.”