Half (45%) of savers with a Lifetime ISA opened their account in order to save for retirement or later life.

This is a similar number to those who opened their LISA to save for a first home (46%), the original purpose of Lifetime ISAs, according to a new report from HMRC.

Rachael Griffin, tax and Financial Planning expert at Quilter, said the report demonstrates how by having split priorities it risks being not fit for purpose.

She said: “Nearly half of account holders opened one to save for their first home, while almost as many used it for retirement. By attempting to serve two distinct goals, the product risks failing to meet either effectively – echoing concerns raised by the Treasury Committee and many in the industry.

“While the 25% government bonus is undeniably popular, with 98% of holders saying it was important in their decision to open an account, the product still carries serious flaws. The withdrawal penalty continues to punish savers even when they are facing financial strain.

“Many people have faced the difficult battle over the need to save for the future versus the need to pay their bills in recent years, and higher costs have often won. This has forced them to stomach the 25% charge to gain access to their money – not only wiping out the government bonus, but some of their own hard-earned savings too.

"HMRC’s own data shows 86% of those making unauthorised withdrawals knew they would lose both the bonus and some of their own savings, but did so anyway, which underlines how desperate people were for access.”

The Lifetime ISA (LISA) was most popular among middle to higher earners. One in ten (11%) of LISA holders earned £125,141 or more annually, and around two fifths (37%) were earning £50,271 to £125,140.

They were also likely to hold other savings products in addition to their LISA. On average the LISA holders held an average of three other savings products.

The LISA is a type of Individual Savings Account launched in April 2017 to help people aged 18 to 40 save for their first home or later life.

Savers aged 18 to 39 can open a LISA, in which they can save up to £4,000 per year (until the age of 50) and receive a government top-up of 25% on the amount subscribed (maximum £1,000 per year).

They can withdraw money from their LISA to buy a first home, after the age of 60 (from April 2037), or if diagnosed with a terminal illness.

LISA holders were generally positive about their experience. 96% said it was easy to open, 89% said it was easy to understand, 87% of those who had made a withdrawal said the process of doing so was easy. And 83% of those surveyed said they would recommend a LISA to others.

According to the HMRC report, around 6 in 10 LISA holder were male (62%), and 36% female. Around 8 in 10 (79%) identify as White British.

The majority of the LISA holders surveyed were employed (79%), with 74% working 30 hours or more a week.

LISA holders most commonly lived in London (26%) or the South East (17%).

Ms Griffin added: “Taken together, these findings underline why the LISA should be central to the Treasury’s upcoming ISA consultation. Small tweaks won’t be enough. A fundamental rethink is needed to create simpler, clearer products that genuinely meet people’s savings goals, rather than leaving them penalised or confused.”

IFF Research surveyed 1,613 savers who had held a LISA on behalf of HMRC between September and November 2024.