While Lifetime ISAs have not proven to be especially popular since their release, they could make a positive impact on your retirement plans.
Not only do they offer significant tax advantages, they also provide a government bonus that could boost your nest egg in order to help you retire earlier with a larger passive income.
As such, now may be the right time to buy FTSE 100 shares through a Lifetime ISA. Doing so may increase your chances of building a significant nest egg and retiring early.
One of the main benefits of investing through a Lifetime ISA is its tax efficiency. There is no capital gains, dividend or income tax charged on any amounts invested through the product. Over the long run, this could lead to significant outperformance versus a portfolio of shares that is invested through a bog-standard share-dealing account.
Indeed, with the dividend allowance currently standing at just £2,000 per annum, many investors may find that having bought and held shares for a number of years, their dividend income is subject to tax. As such, even if a Lifetime ISA’s tax efficiency may not be obvious over the short run if the dividends you receive are currently within the annual allowance, in the long term it could improve your chances of building a large nest egg through paying less tax.
Another appealing aspect of a Lifetime ISA is the government bonus, which is paid each year. It amounts to 25% of all amounts invested in the product, up to the maximum annual allowance of £4,000. It is payable to any individual with a Lifetime ISA from age 18 until 50, which means you could accumulate a government bonus of up to £33,000 during your lifetime.
The returns on the £33,000 could mean that it is highly valuable to you throughout your lifetime. In fact, assuming an annualised return of 8%, the government bonus could end up being worth around £145,000 by the time you are age 50. This could provide your retirement nest egg with a boost, and make the task of retiring earlier easier than it otherwise would be.
Unlike a pension, capital held within a Lifetime ISA can be withdrawn without penalty at any time for the purchase of your first home. This makes it a more flexible product than a SIPP or pension. As a result, it may be more appealing for younger people who have not yet bought their first home, and who may require cash in the near term to put together a deposit.
As withdrawals are also penalty-free after the age of 60, a Lifetime ISA can allow you to retire earlier than the State Pension age. Since this is set to rise, it could be worthwhile for anyone under the age of 40 to open a Lifetime ISA in order to benefit from its tax efficiency, flexibility and the government bonus.
That’s especially the case since the FTSE 100 appears to offer good value for money at the present time. With a wide range of large-cap shares appearing to trade on wide margins of safety, investing through a Lifetime ISA could be a worthwhile move over the long run.
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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.