Savers racked up charges of £33m in the 2020-21 tax year for making early withdrawals, compared to £10m the previous year, according to data gathered by wealth manager, Quilter.

Lifetime ISAs are available to people under 40. You can save up to £4,000 a year and the state adds an annual bonus of up to £1,000.

Savers can only withdraw money penalty-free if they are using it towards a first home purchase or retirement. Withdrawing money for any other reason, means they must pay a 25 per cent penalty.

This penalty was temporarily cut to 20 per cent in March 2020 to help people suffering financially due to the pandemic but was restored to 25 per cent in April 2021.

Rachael Griffin, financial planning expert at Quilter, said the figures reveal the “significant flaws” with lifetime ISAs.

She said: “The pandemic has shown the nation that financial strains can be just around the corner for almost everyone. The government should realise that while we are hopefully not going to experience another event like the Covid crisis, other personal and financial crises will still happen each day and the 25 per cent lifetime ISA withdrawal charge penalises savers who simply can’t predict their financial future.

“The products are meant to be a hybrid between a retirement savings vehicle and an ISA product for first time buyers. Unfortunately, while the product strives for the best of both worlds it falls short. Lifetime ISAs are neither an ISA, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.

“They were a muddled idea to start with and the government should carefully consider their place in the long-term future of the UK’s savings system.”

Data from a Freedom of Information request by Quilter shows that over the previous three tax years, a total of £48m has been levied against lifetime ISA holders for early withdrawals.

Given there were withdrawal charges of £33m in 2020-21, it implies that the total amount withdrawn from lifetime ISAs was around £165m, Quilter said.

The most recent government ISA statistics show that £486m put into lifetime ISAs when they launched in 2017-18, while £604m was subscribed in 2018-19.