According to Hargreaves Lansdown, more than a third of people recently surveyed don’t know what a Lifetime ISA (LISA) is. I’m not surprised. One of the best things about a standard Stocks and Shares ISA is it’s relative simplicity.
But governments love complicating matters, creating different ISA variants over the years each having different rules. I do, however, think a Lifetime ISA can be terrific for those it’s aimed at — young people.
According to HL’s poll, only 36% of 25 to 34-year-olds know what a LISA is. At The Motley Fool we explain how a LISA works, at this link. So I won’t go over it all again. Instead, I’ll just examine its key feature, the 25% annual bonus, and think how I’d make the best use of a LISA.
25% bonus, and penalty
I’d be very careful about the contrast between the extra 25% that the government adds to your contributions, and the penalty for early withdrawal. The annual contribution limit of £4,000 means there’s up to an extra £1,000 per year up for grabs. So over the 32-year period (from age 18 to 50) during which you can contribute, you could have up to an extra £32,000 added for free.
That’s great, but I’d have to be sure I really could keep the cash there for the long term. The 25% penalty for early withdrawal is 25% off the total cash taken out. So you could end up with less than you started with.
But it’s still a tax-efficient investment vehicle, into which the government will add a nice big chunk of extra cash.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How I’d invest
If I had my time again, what would I do with a LISA?
There’s the extra impetus to invest for the long term, especially if I wanted to go for retirement at age 60. And I’d want to invest in shares that I could literally buy and forget about for 40 years. I’d hold any other investments in a standard Stocks and Shares ISA.
For me, it would have to be investment trusts. Specifically, I’d chose from the Dividend Heroes list put together by the Association of Investment Companies. The list includes all investment trusts that have raised their dividends for at least 20 years in a row.
50 years and more
Some, like City of London Investment Trust and Alliance Trust have managed it for 55 straight years now. City of London invests in UK income shares, while Alliance goes for global investments and holds a number of US stocks.
So a bit of money in each of those would get me started with a nice spread of diversification.
Any investment has a chance of losing, even over a long timescale. If any of these trusts should fail to maintain those dividend records, their shares might take a hit.
But it’s the closest approach to a buy-and-forget LISA strategy I can think of.
