If savers choose to take out their money from the Lifetime ISA early, they will lose the Government bonus and have a 5% charge applied, under plans published by the Treasury.

Andy Bell, chief executive at AJ Bell, said: “Assuming the Treasury will receive the 5% penalty there is a huge sense of irony that the Government is making moves to ban early exit fees levied by pension providers but is happy to levy one itself. Early exit penalties are a relic of a bygone pension industry and there is no role for them in modern savings products.

“The proposed 5% early exit penalty is unnecessary and should be abandoned as the final rules for the Lifetime ISA are agreed.

“Unless they are buying their first house, investors will already lose the Government bonus and any interest or investment growth on that bonus if they cash in their investment early. This seems ample deterrent from making early withdrawals.”

He said: “The Lifetime ISA is a fairly transparent move away from the current pension system and taking the negative elements of that system and introducing them to ISAs seems counterproductive. The beauty of ISAs is their simplicity.”

The Budget papers stated this week that the government proposes savers can “make withdrawals at any time for other purposes, but with the government bonus element of the fund (including any interest or growth on that bonus) returned to the government, and a 5% charge applied".

The individual will still have access to their savings and any interest earned on those savings “minus the small charge”, officials said.

Flexibility to borrow funds from the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid will also be considered. The Treasury cited the example of US retirement plans, which allow 50% to be borrowed up to a maximum of $50,000.

Further details about how the rules will work will be announced after the government has “engaged with industry” and brings forward legislation to enact the Lifetime ISA in the autumn, the Treasury said.