I see the Lifetime ISA (LISA) as a great example of the government trying to meddle too much in something that should be easy to understand and simple to use. But it’s a good thing.
The standard ISA is a very good vehicle for investing long-term for your retirement. Coupled with a Self-Invested Personal Pension (SIPP), which provides tax benefits on contributions rather than on drawdown, you can build up a tax-efficient pot for your old age.
Complications
So why did they have to complicate matters with the Lifetime ISA, which few people seem to understand and fewer appear to actually want?
The thing is, the Lifetime ISA actually provides a very attractive benefit, providing you can avoid what could be a nasty sting if you’re not careful.
I’ve previously explained what I see as a complete mess created by the government, and it’s so bad that the Treasury itself has recommended abolishing the LISA due to its (frankly, unsurprisingly) poor uptake. But while it’s still available, you could use one to get a nice extra boost for your pension pot — and I’ll not cover using one to save for a mortgage deposit here, as that just complicates matters.
Making the most
The big beauty for long-term retirement investors is that those who qualify can invest up to £4,000 per year in a LISA — and the government will add an extra 25%, or up to £1,000, to the pot. You have to be aged between 18 and 40 to qualify, but you can keep on contributing until you’re 50… and keep on getting your annual 25% on new money invested each year.
So that’s a total span of 32 years, and up to £32,000 that the government will add to your pot for you. Who wouldn’t want that?
If you want to know what that could add up to by the time you retire, imagine you use up your full allowance each year until you’re 50 and then you think about retiring at 60. Your extra £32,000 invested for just those 10 years at an annual return of 6% (which I think is easily attainable by investing in blue-chip dividend-paying shares) would grow into £57,000.
It gets better
But it’s better than that, because your £1,000 bonus in your first year at age 18 will have grown to £11,500 by the time you reach 60, the second year’s to £10,900, and so on… By the time you reach 60, you’ll actually have more than £170,000 sitting there as a free gift from the government.Â
Include your own maximum £4,000 per year contributions and you’d have around £860,000 to start your retirement years.
Mind the sting
But here’s the big sting that you’ll need to avoid. If you withdraw any of the cash before you reach 60 (other than for a home purchase), you’ll be hit with a 25% penalty. And that’s not just the 25% the government added, it’s 25% of the total. So, if you withdraw one year’s contributions of £5,000 (your £4,000 plus your bonus £1,000), you’ll be stung to the tune of £1,250. As well as forfeiting your £1,000 bonus, you’ll also lose £250 off your own contribution too.
I think that’s an appalling treatment of investors and I can see why it would scare off a lot of people.Â
But if you’re confident you can avoid early withdrawals, I reckon a Lifetime ISA is a great way to help beat the State Pension.