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Here’s why I think you need to open a Lifetime ISA

I think the Lifetime ISA is one of the best savings tools on the market today for 18 to 39 year-olds. 

I would go so far as to say that if you fall into this age bracket and do not already have a Lifetime ISA, I think you should open one today to make the most of this fantastic opportunity.

Growing demand

Introduced a couple of years ago to help young people start saving, the Lifetime ISA was initially attacked for making the ISA system more complicated. However, as consumers have become used to the idea, savers have signed up in droves. A total of 268,000 people have signed up since its launch in April 2017.

If you are aged 18 to 39, you can open a Lifetime ISA and save up to £4,000 tax-free each year. You can keep saving right up to, and including the day before your 50th birthday. The government will pay a 25% bonus on any contributions, up to a maximum of £1,000 a year. 

On top of this, any interest income received or capital gains generated on the money you save are tax-free. 

Unfortunately, there are some caveats to this tax-free wrapper. Any withdrawal before the age of 60 or for any other reason apart from the acquisition of your first home, will attract a 25% government withdrawal charge. Also, if you close your Lifetime ISA after you reach age 40, you won’t be able to open a new one although you can continue to save into one up to your 50th birthday. 

Market returns

The cash bonus, coupled with the tax-efficient benefits of an ISA wrapper are the two primary reasons why I believe this is one of the most fantastic ways to save for the future. 

Investing the money you save into a Lifetime ISA is the best way, in my opinion, to achieve the best returns.

Over the past decade, the FTSE 100 has produced an average annual return for investors in the region of 8%. In comparison, the best Lifetime ISA cash interest rate available on the market today is just 1.4% — that’s a big gap. 

At this rate of return, assuming a saver puts away the full £4,000 a year, including the extra £1,000 government bonus I calculated they could build a savings pot worth £202,000 over 32 years of saving (from 18 to 50).

However, if the same saver put away the same £5,000 a year, but invested this money in a FTSE 100 tracker fund, rather than holding it in cash, I calculated they could accumulate savings of nearly £745,000.

Multiple benefits

Investing not only gives you the chance to earn higher returns, but it also helps you diversify outside of the UK.

For example, more than 70% of profits from FTSE 100 companies come from outside the UK, so in the event of a messy Brexit, investors shouldn’t be left too out-of-pocket. 

Also, by using a low-cost index fund, you can get exposure to some of the largest companies in the world at the click of a button without having to spend hours researching each opportunity or racking up hundreds of pounds in trading commissions. 

So, that’s why I think you need to open a Lifetime ISA today and start investing your money as well. 

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Rupert Hargreaves owns no share 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.