The Lifetime Isa withdrawal penalty cannot be scrapped because of the nature of the product, according to Emma Reynolds, Economic Secretary to the Treasury.

Giving evidence in front of the Treasury Select Committee, Reynolds discussed the government’s plans to look into Isa reform.

The minister was asked by a committee member whether the government was assessing if the 25 per cent early withdrawal penalty needed to change.

Reynolds said: “The Lisa is a voluntary savings product, and people go into it with their eyes wide open.

We can’t have a product that gives you 25 per cent when there isn’t any penalty for withdrawing from it if you’re not complying with the intended purpose

“They, and the providers, should make sure they understand the terms and conditions and having some rules around a penalty if you withdraw is in line with, for example, rules around if you were to make an unauthorised withdrawal of your pension.

“In fact, the penalty for withdrawing your pension early is much heftier than the 25 per cent in this case.

“So there has to be some sort of penalty or withdrawal charge in a product like this.”

The minister highlighted that if any changes were made it would cost money and this money “would have to come from somewhere else”.

Reynolds was pressed by a committee member whether she genuinely believed people were opening a Lisa fully informed of the choices they were making after HMRC’s research showed there was confusion around the withdrawal penalty.

The minister went on to say it was not the government’s responsibility to ensure people understood the terms and conditions of the product but rather providers.

“Providers do have a responsibility to explain to those who are subscribing to the Lisa what the rules are, what the terms and conditions are, what would happen if they withdraw and when they shouldn’t be withdrawing. So those rules should be set out by the provider,” she explained.

Reynolds added the intended purpose of the Lisa was to help people to buy a home and save for retirement and if a withdrawal was made that did not comply with that purpose, it was “quite normal” that there should be a penalty.

“There has to be some quid pro quo. That’s the deal, you get 25 per cent on top of your investment.

“We can’t have a product that gives you 25 per cent when there isn’t any penalty for withdrawing from it if you’re not complying with the intended purpose. Otherwise, you get so many people into the product who are not using it for its intended purpose,” she added.

Reynolds was asked whether she saw any harms with the withdrawal charge in its current design.

“I’ve read some of the evidence to your committee, and I have received correspondences about the charge, but we have to have some rules, and inevitably, there will be some hard edges,” the minister said.