For many people, retiring with a £1m nest egg would be viewed as a successful scenario. Assuming a retiree takes a 4% income from their portfolio, this could provide a £40,000 annual income, which is almost five times higher than the State Pension.
However, achieving a goal of a seven-figure retirement portfolio without investing in the stock market could prove challenging. Low returns on a Cash ISA, coupled with the bonus which is available on a Lifetime ISA, means investing in the stock market could be a worthwhile move that could help you to become a retirement millionaire.
For every £1 paid into a Lifetime ISA the government pays a bonus of £0.25. Since it’s possible to invest up to £4,000 in a Lifetime ISA per tax year, there’s a £1,000 government bonus on offer each year. Over an individual’s lifetime, this could lead to £33,000 in bonuses. This assumes they start at age 18 and invest £4,000 each year until age 50.
To put that figure of £33,000 in bonuses in perspective, it’s only slightly less than the total amount of interest which a Cash ISA would generate during the entire period of 33 years. Assuming £4,000 is invested in a Cash ISA from age 18 to age 50, and the interest rate available remains at 1.5%, total interest paid during the period would be around £38,000.
Clearly, interest rates are likely to change in the long run, so a Cash ISA’s return could be higher. However, a Lifetime ISA provides a significant proportion of the potential returns available on a Cash ISA from the government bonus alone. Therefore, it has a major advantage over a Cash ISA in terms of its return potential in the long run.
As well as a government bonus, a Lifetime ISA provides the opportunity to invest in a variety of stocks from the FTSE 100, FTSE 250 and also among smaller companies. Although the stock market is riskier than holding cash, with the potential for capital losses, in the long run its overall performance has generally outperformed cash. In fact, the FTSE 100 offers a dividend yield in excess of 4% at present, while it’s expected to post capital growth to produce a total return which is in the high single-digits per year over the long run.
Therefore, the potential to have a sizeable nest egg in the long run is significantly higher through a Lifetime ISA than a Cash ISA. A Lifetime ISA’s mix of a government bonus and the return potential of shares mean that investing in a Cash ISA may ultimately yield disappointing results for individuals who utilise it. And, with the FTSE 100 appearing to offer good value for money at the present time, now could be a good time to start investing through a Lifetime ISA.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.