While the FTSE 100 offers the potential to generate high returns, investing through a Lifetime ISA may be an even more attractive proposition.
The product provides a 25% government bonus on all amounts invested up to the maximum allowance of £4,000 per year.
This could mean that a sizeable bonus is on offer for investors who decide to open a Lifetime ISA. This may have a significant impact on their long-term returns and financial position.
25% return opportunity
For an investor who has £1,000 to invest in the FTSE 100 per year, a £250 bonus could be extremely appealing. It means that they will have an initial 25% return on their capital, while providing a larger amount from which to generate additional returns.
With the bonus being payable between the ages of 18 and 50, after which no contributions can be made to a Lifetime ISA, the impact of the bonus on an investor’s nest egg could be significant.
For example, without the bonus, a £1,000 annual investment in the FTSE 100 that delivers a 7% annualised return would be worth £119,000 by the time an investor reaches age 50. By contrast, a Lifetime ISA’s 25% bonus means that an investor’s nest egg would be worth £149,000 by age 50, assuming the same returns are generated from the FTSE 100.
As well as an investor having the potential to generate significantly higher returns from a Lifetime ISA versus a Stocks and Shares ISA or bog-standard share-dealing account, the process of opening and managing the product is also relatively straightforward. In fact, a Lifetime ISA operates in much the same way as a Stocks and Shares ISA in terms of how trades are undertaken and the types of investments that can be made.
As such, it offers a simple means of gaining exposure to the stock market. This could mean that its 25% government bonus, and the investment potential that it offers over the long run, is available to a wide range of investors.
FTSE 100 appeal
Of course, it may be possible to generate even higher returns than those offered by the FTSE 100. At the present time, there are a number of stocks that appear to have wide margins of safety. They could therefore offer impressive capital growth potential. Likewise, a wide range of FTSE 100 stocks are forecast to pay growing dividends in the coming years. This may mean that their total returns exceed those of the index – even if they are only able to post modest capital gains over the long run.
As such, while the appeal of a Lifetime ISA is high due to its 25% government bonus, the FTSE 100 could provide an investor with the opportunity to generate a sizeable nest egg by the time they retire. Therefore, now could be the right time to start buying large-cap shares through a Lifetime ISA with the intention of holding them for the long term.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.