What is the LISA withdrawal penalty?

Full answer

The Lifetime ISA (LISA) is designed for one of two purposes: buying your first home (property up to £450,000) or retirement from age 60. The government adds a 25% bonus on contributions up to £4,000 per year (maximum bonus £1,000/year). Withdrawing for any other reason triggers a 25% penalty on the full withdrawal amount. **The maths that catches people out:** - You save £1,000. The government adds a 25% bonus = £250. Your LISA now holds £1,250. - You withdraw £1,250 for an unauthorised reason. The penalty is 25% × £1,250 = £312.50. - You receive £1,250 − £312.50 = £937.50 — that's £62.50 less than you put in. The penalty is designed to recover the government bonus (£250) and a small further amount (£62.50), leaving you genuinely worse off versus keeping the money in a regular savings account. **Authorised withdrawals (no penalty):** 1. Purchasing a first home costing up to £450,000 (must have held the LISA for at least 12 months). 2. Reaching age 60 (terminal illness is also exempt). 3. Closure on terminal illness diagnosis. **Risks to be aware of:** - **Conveyancing delays:** If a property purchase falls through after the LISA funds have been withdrawn for the purchase, timing issues can sometimes trigger the penalty — HMRC has some discretion but it is not guaranteed. - **Property price cap:** The £450,000 first-home cap is not index-linked — in London and the South East, many first-time buyers are now priced out of using their LISA for purchase, meaning the funds are locked until age 60. - **ABI criticism:** The Association of British Insurers and consumer groups have repeatedly called for the penalty to be reduced from 25% to recover only the bonus (which would be approximately 20% of the withdrawal amount). No change has been made as of 2026.

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