The new analysis, which follows a freedom of information request, comes at a time when helping people save for a home is a key theme politicians are focused on in the run up to the General Election.

LISAs were launched in April 2017 to help first-time buyers get on the property ladder.

Savers receive a 25% government boost when they use the funds to buy a qualifying first home, and like all ISAs, they are a tax-efficient way to save because the interest is tax free.

You can withdraw money from your LISA if you are buying your first home, aged 60-plus or terminally ill. However, an ‘unauthorised withdrawal’ penalty of 25% applies if money is taken for any other reason.

Furthermore, LISA savers must pay a 6.25% fine if they buy a home costing over £450,000 – a cap which has been frozen for seven years. This is also classified as an ‘unauthorised withdrawal’ penalty.

The problem is that house prices have risen sharply since the £450,000 limit was introduced. Land Registry data shows that between April 2017 and March 2024, the average UK property jumped in value by 29.3%.

Prices paid by first-time buyers soared by 42% in both Wales and North West England, and the average first-time buyer property now costs over £450,000 in four out of five London boroughs.

MPowered’s research reveals that 7% of LISA savers made an ‘unauthorised withdrawal’ in the year to April 2023, each receiving an average fine of £633.

The proportion of savers fined has more than doubled in just three years, and experts warn that thousands more could fall into the same trap as house prices start to rise again.

MPowered’s freedom of information request revealed that more than £4bn is currently held in over a million LISA accounts.

More than 275,000 new accounts are opened every year, but since launch just 12% of account holders (171,050) have made a penalty-free withdrawal to buy a home – meaning nearly nine out of 10 have either made no withdrawals or given up on the scheme and swallowed the penalty for breaking the rules.

MPowered is calling for the next government to urgently overhaul the LISA rules by index-linking the property price limit to take account of rising house prices.

MPowered chief executive Stuart Cheetham (pictured left) commented: “Lifetime ISAs were created to help first-time buyers save up to buy a home, but thousands of savers are being unfairly penalised each year for doing just this.

“The LISA withdrawal penalties are designed to ensure savers only use these accounts for what they are designed for – buying a first home or saving for retirement – but the cap on the value of property they can be used for means LISAs are increasingly unfit for purpose.”

He added: “Forget reheating the failed Help-to-Buy scheme or tinkering with stamp duty, the next Government should act fast to reform the outdated LISA rules. While the LISA withdrawal restrictions are well intentioned, the property price cap needlessly penalises some savers for accessing their own money – it should be index-linked to reflect the rising tide of house prices.”