The executive chair of Money Saving Expert gave evidence before the Treasury Committee yesterday, which is reviewing whether LISAs are “fit for purpose.”   

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

Withdrawals can only be made to buy a first home, if the person is 60 or over or terminally ill with under 12 months to live. 

But the 25% early withdrawal charge currently imposed effectively acts as a 6.25% exit penalty on a consumer’s own savings. 

Lewis said that savers, “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”.

He added: “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.” 

Treasury committee chair Dame Meg Hillier pointed out that last year more people paid this penalty than actually used a LISA to buy their first home. 

Almost 100,000 people made unauthorised LISA withdrawals in the 2023/24 tax year, according to AJ Bell.

Hoops Finance founder Funmi Olufunwa, also appearing before the committee, added that the £450,000 threshold on house purchases the product is capped at should be raised. 

She said that since the product was launched in 2017 home prices have lifted by around 30%, so a new cap to “reflect that [means] we’re looking at about £585,000 as an average.” 

Lewis added that the dual aspect of the product — as a way of saving for a house deposit and as a pension vehicle was not widely understood by savers. 

He said: “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.  

“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.” 

Since 2018, around 227,000 people have used the product to buy a property using over £3bn of LISA savings. 

LISAs were introduced in 2016 by former Chancellor George Osborne 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.