One of the difficulties in seeking to generate sufficient retirement savings is that other things get in the way. For some people this could be buying a home, while for others it may be starting a family. Others may prioritise spending today, rather than planning for the long term.
As such, pensions can lack appeal, since the money invested can’t be withdrawn until at least age 55. Lifetime ISAs, therefore, may present a potentially worthwhile means of planning for retirement due to their flexibility. Alongside this, their tax avoidance appeal and the government bonus may also make it easier to make a million in the long run.
Government bonus
Unlike a pension or a SIPP, contributions to a Lifetime ISA are made after income tax has been paid by an individual. This means it lacks the tax advantages of a pension or a SIPP, since 25% of their withdrawals after the age of 55 can be made tax-free. To counter this, a government bonus is paid on up to £4,000 of contributions to a Lifetime ISA at a rate of 25%. This means that there’s a £1,000 bonus available per year for anyone between the ages of 18-50, at which point the bonus ceases to be paid.
As a result, over the course of a lifetime, it’s possible to receive £32,000 in government bonuses. When added to the £4,000 per year which would need to be contributed in order to receive the bonus, this equates to a total pension of £160,000. Clearly, that’s well short of £1m, but if contributions are invested in an index such as the FTSE 250 each year, they could be worth as much as £1.9m by the age of 60. This assumes the FTSE 250 delivers the same 9% annualised return as it has done over the last 20 years.
Flexibility
As mentioned, a Lifetime ISA may provide greater flexibility than a pension. Contributions can be withdrawn at any time, although they’re subject to a 25% penalty. Withdrawals for the purchase of a first home, however, are not subject to a penalty. This means that younger investors may be able to invest in a Lifetime ISA and, should they wish to focus on buying their first home instead of planning for retirement, can change their minds without penalty.
As with a Stocks and Shares ISA, a Lifetime ISA doesn’t incur dividend or capital gains tax. Withdrawals are tax-free after the age of 60. This may make it simpler for an individual to determine how much capital they have available for retirement, and could make it easier to budget what they will need to invest for older age.
Since Lifetime ISAs are relatively cheap to administer and the cost of sharedealing is highly competitive, it could make sense for anyone under the age of 40 to open one. Doing so could help to make it easier to retire comfortably, or even with over £1m.
