Lifetime ISAs are not as popular as they should be. They offer up to a £1,000 bonus per year, simply in return for investing up to £4,000 per annum. This could amount to a significant sum over the long run. In fact, if invested in the FTSE 250, the bonus alone could be worth as much as £388,000 over an individual’s lifetime.
How they work
A Lifetime ISA is available for any individual aged between 18 and 40. They are essentially a variation of the Stocks and Shares ISA, offering similar tax benefits. However, their main difference is that a Lifetime ISA offers a government bonus of 25% of amounts contributed up to the £4,000 maximum allowance per year. This means that an individual could pay in £128,000 between the ages of 18 and 50, when contributions must end, and in doing so may have £32,000 in government bonuses.
Investing
The £32,000 figure assumes that an investor obtains a 0% return on their capital. If the government bonus is instead invested in the FTSE 250 over course of the 32 years it is paid, as well as over the next decade until withdrawals can be made from the Lifetime ISA without penalty, it could amount to as much as £388,000. This assumes that the FTSE 250 continues to return the 9% it has done on an annualised basis over the last two decades.
Clearly, the value of an individual’s Lifetime ISA could be significantly greater than £388,000, since that figure is solely for the bonus part of the portfolio. Should they contribute £4,000 per annum between ages 18 and 50, their Lifetime ISA could be worth almost £2m by the time they reach age 60.
Limitations
Of course, many people may not have £4,000 to invest in a Lifetime ISA each year. The key takeaway, though, is that even a modest investment can leave an individual in a surprisingly strong financial position when it comes to retirement. Starting early and allowing returns in a range of mid- or large-cap shares to compound can produce high returns, while the government bonus acts as a significant boost on total returns.
But a Lifetime ISA is more restrictive than a Stocks and Shares ISA. Amounts invested cannot be withdrawn without penalty until age 60, unless they are used to fund the purchase of a first home. However, this could remove the temptation to dip into retirement savings.
Simplicity
With it being relatively straightforward to open a Lifetime ISA, it is a product that is available to almost anyone. The cost of doing so is minimal, with online share-dealing having lowered trading costs in recent years. The internet has also made the product more accessible for a wider range of people. As such, now could be the right time for anyone under the age of 40 looking to improve their retirement prospects to open a Lifetime ISA.