Martin Lewis has issued a warning about a “ridiculously unfair” penalty that savers have to pay. The consumer expert said he has been calling for years for the policy to be changed.

On a recent episode of his BBC podcast, Mr Lewis spoke at length about Lifetime ISAs. Savers may want to look at paying into ISAs now with the turn of the tax year looming, when the £20,000 ISA allowance will reset.

Lifetime ISAs are a vehicle for saving for your first home or for your later life, as you can use the cash towards your first home or you can access it when you turn 60. You can pay in up to £4,000 each tax year, and any deposits get a 25 percent bonus, meaning you could get an extra £1,000 each year.

However, one restriction on how you use the funds if going towards a first home is they can only be used for a property valued at £450,000 or less. With rising house prices, this means some first-time buyers are unable to use their funds without paying a penalty.

If you use the funds for a property above this value or for another unauthorised withdrawal, you have to pay a 25 percent penalty, which takes away the bonus as well as some of the amount you originally paid in.

‘Ridiculously unfair’

Mr Lewis said he has been campaigning for about five years for the property threshold to be increased. He said: “I’ve spoken to Rachel Reeves about it. She said she’s looking at doing it, she’s told me that when they do the consultation on the LISA replacement, they will look at whether they will increase the £450,000.”

The Government announced as part of the Autumn Budget 2025 that it would replace the Lifetime ISA. Mr Lewis spelled out his misgivings about the current rules.

He said: “Clearly, it’s ridiculously unfair to have that frozen. People got these products in 2017 thinking they were going to be able to use it.

“House prices have gone up, the threshold hasn’t, some people have been priced out and they’re now having to pay a fine, a penalty to the state, for having opened a product that the state wanted them to, to be a first time buyer – they are re going to be a first time buyer, but they’re priced out of the market.

“Not only are they not going to get their bonus, but they’re paying an effective penalty, so it’s hideously unjust.” The expert said he is unsure what will happen in the future with the property cap.

Could the property cap change?

He said: “I don’t know what’s going to happen. I’ve had politicians look at me and effectively say, yes we’ll up that limit at some point, and they’ve not done it.

“So you simply have to work on the assumption for the moment, that if you’ve got a Lifetime ISA, the limit is £450,000 and it’s not going to change. I hope to be wrong, but I wouldn’t be betting on being wrong.”

You can open a Lifetime ISA between the ages of 18 and 39, and pay into the account up to the age of 50.