The Lifetime ISAs will need to carry a penalty in the same fashion as other long-term saving options, said Economic Secretary to the Treasury Emma Reynolds.  

Reynolds was speaking to the Treasury Committee this afternoon, which is reviewing whether LISAs are “fit for purpose.”    

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.   

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, 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.” 

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. 

But Reynolds said: “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, she stressed that the government’s review of Isas and LISAs were at “the policy formation stage” and the Treasury Committee’s own report on LISAs would feed into its own thinking. 

Awareness of specific withdrawal conditions for the LISA was “relatively low” among both LISA holders and non-holders, according to an HMRC poll released yesterday. 

Quilter tax and financial planning expert Shaun Moore added that the custom’s survey “lays bare the confusion at the heart of one of the government’s flagship savings products”. 

More pointed out: “Most striking is the revelation that even financially literate savers, including those actively contributing to their LISA, did not realise that the 25% penalty on non-qualifying withdrawals can leave them with less than they originally invested.  

“People simply do not realise it’s not just a clawback of the government bonus – it’s a loss on their own money.” 

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.