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Saving for retirement? This ISA ‘trick’ could generate £2,000 in the next two months

How would you like an extra £2,000 of savings? At first, this statement might seem too good to be true. There’s usually a catch when free money is on offer. However, on this occasion, there isn’t. All you need to do is open two Lifetime Individual Savings Accounts (LISAs) over the next two months to qualify for £2,000 in free cash.

Free cash

LISAs were first introduced by the government a few years ago to help retirement savers and first-time buyers. They lets you save £4k a year towards your first home, or retirement. The government adds a 25% bonus on top of what you save. So, if you take the full £4,000 allowance, the government will add an extra £1,000.

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The one draw-back is that you can only use the cash for two purposes, retirement or the purchase of a first home. If you withdraw the money for any other reason, you’ll have to pay a penalty of 25%. This means you’ll not only lose your government bonus, but an extra 6.25% on top.

The LISA allowance renews at the beginning of every tax year. That’s 6 April. As such, in the next two months, savvy savers could open two of these products. This could unlock as much as £2,000 of free government cash in the process.

Higher returns

Even if you only have a few £100 saved, it’s worth opening one of these products if you’re serious about saving for the future. A 25% return on your money in just a few weeks is extremely attractive. You’re unlikely to get this sort of return anywhere else.

What’s more, any money saved in the ISA doesn’t attract further income or capital gains taxes. That makes it one of the best long-term savings products.

Indeed, since inception three-and-a-half decades ago, the FTSE 250 has returned around 10% per annum. While it’s difficult to tell what the market will do in the short term, it’s highly likely that, in the long run, the FTSE 250 will yield similar returns to its historical average.

As such, if an investor puts £4,000 into a LISA, and then invested this money (including a £1,000 government bonus) in an FTSE 250 tracker fund, it could grow to be worth £13.5k within 10 years. That’s assuming an average annual rate of return of 10% and no further contributions.

A saver who takes the government up on its £2k free cash offer in the next two months could turn contributions of £8,000 into £27,000 after 10 years. That’s assuming an average annual return of 10%.

These numbers show why opening two LISAs over the next few weeks could revolutionise your financial situation. The free government cash could jump-start your savings journey. If the money is invested in a low-cost passive tracker fund, it could grow into a substantial financial nest egg during the next decade.

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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.