The savings product allows people under 40 to open a LISA and put in up to £4,000 each year until they’re 50 to buy their first home. At the end of each tax year, this is topped up by a 25% bonus from HMRC.    

But its 25% early withdrawal charge effectively acts as a 6.25% exit penalty on a consumer’s own savings and has been criticised as unfair by many commentators. 

However, Economic Secretary to the Treasury Emma Reynolds said: “Having rules around a penalty if you withdraw are in line with unauthorised withdrawals of a pension.   

“The penalty of withdrawing your pension earlier is much heavier than the 25% in this case.   

“We can’t have a risk-free option of investing for the long-term, but if you take your money out, there is not a charge. We would not have that situation.”  

Reynolds was giving evidence to the Treasury Committee yesterday, which is reviewing whether LISAs are “fit for purpose.”      

The scheme also has a £450,000 threshold cap on house purchases, which many say does not cover many first-time buyer properties in London and the Southeast — and should be raised.  

In London, the average first home costs £511,500 with the average deposit now £124,700. 

But Reynolds added: “Any changes that could be made to improve that situation would cost money — and that money would have to be found from somewhere else.” 

However, Skipton Building Society Home Financing chief executive Charlotte Harrison (pictured) said: “The minister’s comments to the Committee on the purchase price cap and withdrawal penalty were disappointing.”

Skipton, which has over 160,000 LISA savers, from its own analysis forecasts that, by the end of 2027, the LISA house purchase price cap of £450,000 will fall below the average FTB property price in 12% of local authorities in England.  

Harrison added: “This means that the current level of the maximum purchase price cap isn’t just a London issue.” 

The mutual has called for the purchase price cap to be raised to £500,000.

Harrison said: “We’ve also been calling for a reduction to the unauthorised withdrawal penalty from 25% to 20%, ensuring that LISA savers are not losing capital as a result of changing circumstances so the minister’s suggestion that it was ‘quite normal’ that there should be a penalty was disappointing.” 

Moneybox head of personal finance Brian Byrnes added that the government should take action to improve “one of the most impactful financial products introduced in recent years”. 

Byrnes said: “Small, pragmatic changes—such as increasing the property price cap and adjusting the unauthorised withdrawal penalty—would ensure the LISA continues to deliver for FTBs in a fast-changing economic landscape.” 

He added: “While much focus is rightly placed on increasing housing supply, this remains a long-term goal.  

“In the meantime, we urge the government to invest in near-term, practical solutions that support aspiring FTBs today—helping them save, build deposits, and access affordable mortgages.” 

In February, money guru Martin Lewis told the Treasury Committee that the LISA 25% withdrawal penalty “needs to change” because it is unfair and hits people from less financially educated backgrounds.   

LISAs were introduced in 2016 by former Chancellor George Osborne and went live a year later.   

The aim was to provide an alternative method of tax-free saving for retirement, while at the same time encouraging people under 40 to save for a home by offering incentives to get on the property ladder.  

Since then, £9.5bn has been invested in this product, attracting £2.4bn in government bonuses, according to HMRC data.