Lifetime ISAs have proven to be surprisingly unpopular among investors. Certainly, the fact that they are only available to individuals aged under 40 limits the number of investors who can open them. However, they offer significant tax advantages, as well as a government bonus, so they could enhance the financial futures of a wide range of people. Combined with a Stocks and Shares ISA and held over several decades, they could help investors on their way to being ISA millionaires.
Furthermore, Lifetime ISAs are easy to open, and are low-cost in many instances. And with the stock market appearing to offer good value for money at the present time, now could be a sound opportunity to benefit from using them.
Tax advantages
While the idea of paying capital gains tax or dividend tax may not be at the forefront of many investors’ minds when buying shares, in the long run it can significantly reduce overall returns. Certainly, the £11,100 capital gains tax allowance and £2,000 dividend tax allowance per year may seem generous in the short run. But in the long run, when the impact of regular investing and compounding take hold, they can appear to be significantly smaller.
As such, the Lifetime ISA’s tax efficiency, in terms of it not being subject to capital gains or dividend tax, could make it an appealing product in the long run.
Bonus
For every contribution to a Lifetime ISA up to the maximum annual allowance of £4,000, the government will pay a 25% bonus. This is extremely appealing long term, and could make a significant impact upon an individual’s financial future.
It also makes a Lifetime ISA much more appealing than a Stocks and Shares ISA (although these, in their turn, are much more appealing than a Cash ISA). Therefore, it may be logical for an individual to first use up their £4,000 annual allowance for a Lifetime ISA before seeking to pay into their Stocks and Shares ISA.
Investment opportunity
While the UK economy faces an uncertain near-term outlook, now could be a good time to start investing for the long run. A number of UK-focused shares have low valuations, which could provide an opportunity for high rewards over time. And as a wide range of global stocks have operations in fast-growing economies such as India and China, it is possible for an investor to diversify away from the UK should they wish to do so.
With online share-dealing becoming increasingly popular and widespread, it is easier than ever to open a Lifetime ISA. The cost of doing so is relatively low, and management fees are fairly competitive when compared to the potential rewards that are on offer in the form of that government bonus.
Therefore, while take-up of Lifetime ISAs has been relatively low since they were launched, it would not be surprising were they to become increasingly popular once word gets out. After all, they could make it easier to generate improving wealth levels over the long run.
