The Lifetime ISA has the potential to boost the retirement savings prospects for millions of people in the UK. Although it may not yet be seen as an obvious means of providing for life in retirement, it has the potential to deliver a significant income to supplement the State Pension.
In fact, due to a mix of features, it could pave the way to making a million from investing in the stock market. Here’s why it could be a worthwhile product in the long term.
With the government contributing £1 for every £4 invested in a Lifetime ISA, the odds appear to be more favourably stacked in an investor’s favour than is the case through a standard ISA or sharedealing account. The government bonus could be worth as much as £32,000 during an investor’s lifetime, since it’s available from the age of 18 until 50, at which point no further contributions can be made to a Lifetime ISA.
However, the value of that £32,000 over the course of a lifetime may be much higher than it seems at first glance. In the last 20 years, the FTSE 250 has returned around 10% per annum, including dividend payments. If the maximum government bonus of £1,000 is invested in the index each year, from the age of 18 to 50, it could be worth as much as £200,000 by the end of the maximum period. And, by the time of retirement at age 67, an individual could have a nest egg of over £1m – just from the government bonus being invested and kept in the FTSE 250 over a lifetime.
Of course, to obtain the maximum £1,000 government bonus each year, an individual must pay £4,000 into the Lifetime ISA per year. If the total contribution of £5,000 per year (which includes the government bonus) is invested in the FTSE 250 from aged 18 to 50, and then kept in the index from 50 to 67, it could be worth as much as £5m by the time an individual retires.
Clearly, it’s relatively unlikely that a younger person will be able to invest £4,000 per year, given the cost of education, housing and possible lower earnings at the start of a career. But it shows just how powerful a Lifetime ISA could be in terms of generating wealth during the long run. And even the government bonus on its own could be worth £1m if invested in the FTSE 250 over the long term.
While it’s not easy to become a stock market millionaire, the government is making it simpler to achieve this goal. A Lifetime ISA may not be a particularly exciting focus for many people – especially when compared to the potential of relatively speculative investments. But in the long run, concentrating on compounding, diversification and obtaining a government bonus could have the biggest impact on whether an individual achieves millionaire status… or not.
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