The Motley Fool

How a Lifetime ISA could double your State Pension

Although the State Pension has increased to £8,767.20 annually for the new tax year, this is unlikely to provide a sufficient income for most people in retirement. As such, building a nest egg during the course of a working life could be a shrewd move, with a Lifetime ISA being a sound means of doing this.

Not only does a Lifetime ISA offer the tax advantages of a Stocks and Shares ISA, it also offers a government bonus. With the prospects for the UK economy being uncertain at the present time, investing in UK-focused shares may be a sound move for investors who have a long-term outlook.

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Growth potential

With all amounts to a Lifetime ISA up to a maximum of £4,000 per year benefitting from a 25% government bonus, it is possible for an individual to invest £5,000 per year in total. With the FTSE 250, which generates the majority of its income from the UK, having recorded a high single-digit total returns per year over the last 20 years, it may be possible to build a significant nest egg in a surprisingly short space of time.

If the index continues to rise at the same rate in future as it has done in the past, it may be possible for a £5,000 total investment per year to become £220,000 within less than 20 years. The figure of £220,000 would mean that an individual could withdraw 4% per year, and in doing so double their State Pension. With a 4% withdrawal figure generally being viewed as a sustainable level in terms of allowing a portfolio to continue to grow, investing in the FTSE 250 on a regular basis through a Lifetime ISA could be a shrewd move.

UK outlook

Of course, in the short run, the index could experience some volatility. The UK economy is expected to grow at a slower pace than all EU countries except for Germany and Italy in the current year, which suggests that the Brexit process may be weighing on consumer and business confidence to at least some degree. This situation may continue in the near term, but the index could move higher after what has been a strong first part of 2019.

In fact, investors appear to have priced in many of the risks facing UK-focused companies. There are a number of companies within the index that appear to offer wide margins of safety, despite them having relatively positive earnings growth outlooks. And with employment levels being high, monetary policy being accommodative and inflation standing at modest levels, the outlook for the UK economy over the long run may be stronger than many investors are currently anticipating.

Therefore, for investors who have a 20-year horizon, taking advantage of the government bonus through a Lifetime ISA could be a good idea. Investing that capital in the FTSE 250 may mean there is a ‘rollercoaster ride’ in the short run. But in the long run, there could be significant returns on offer that build a portfolio that can double the income from the State Pension each year.

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