Lifetime ISAs, or LISAs for short, can be a great tool to help you save for the future. You can put away a maximum of £4,000 each tax year into a LISA. The government then adds a 25% bonus on top.
For example, if you put £1,000 into your Lifetime ISA, the government will add an extra £250. This would give you £1,250 at the end of the tax year.
The maximum bonus you can receive is £1,000 on an annual contribution of £4,000. If you contribute to the maximum of £4,000, the government will add an extra £1,000. This would add up to £5,000 at the end of the tax year.
Unfortunately, the product does come with some restrictions. For a start, to open a LISA, you need to be between the age of 18 and 40, although you can continue paying into one until you are 50. What’s more, the money used must be for a first home or retirement. Only first-time buyers can use LISAs to buy a home.
If you take your money out for any other reason, you could end up paying a 25% charge. This means the product’s only really suitable if you’re buying a first home or saving for retirement.
Still, the monetary bonus is worth taking advantage of, especially because it could give you £33,000 of government cash towards your retirement or first home. And it’s possible to build your LISA savings into a substantial retirement pot.
But what would be a good investment for your LISA cash? I like the FTSE 250. Over the past three-and-a-half decades, the FTSE 250 has produced an average annual return in the region of 12%. This implies if you had invested £5,000 a year, or roughly £417 a month, including the government bonus, into the index over this time frame, you’d be sitting on a pot of £2.7m today.
It would take just 27 years of saving £5,000 a year to accumulate a pension pot of £1m. Excluding the government bonus, that works out at £330 a month.
It isn’t very easy to tell what the future holds for the stock market and a short term. However, in the long term, it is highly likely the index, specifically the FTSE 250, will be higher than it is today.
This index is made up of some of the fastest-growing stocks in the UK. As it’s a market capitalisation weighted index, the more prominent companies have a disproportionate impact on performance. This means the best-performing shares float to the top while the worst sink. That makes the index a good proxy for growth investors.
As long as the UK economy keeps growing, these companies should also continue to grow over the long term. Also, many of them have international exposure. So, no matter what happens to the UK economy in the short term, there’s a good chance the FTSE 250 will continue to rise.
As such, if you want to build a sizable nest egg with a LISA, buying a low-cost FTSE 250 tracker fund might be the best way to do so.
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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.