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The Lifetime ISA receives a lot of criticism at times but it can be a really powerful investment vehicle, especially if one is using it as a retirement savings account (as I am). With this account, contributions come with generous bonuses from the government and investments can grow free of tax.
Here, I’m going to show how much money an investor could potentially build up in this type of ISA by the age of 50 (and 60) if they started contributing at 35. Let’s dive in.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The potential for substantial retirement savings
The annual allowance for the Lifetime ISA is only £4,000. However, for every £1 you contribute, the government will add in another 25p (up to age 50).
A risk-free return of 25% is an incredible deal. Contribute the full £4,000 and you’ll pick up an extra £1,000.
Let’s say that an investor puts the full £4,000 in every year, starting at the age of 35 (and picks up the £1k bonus every year). And let’s say that they are able to generate a return of 8% per year after fees.
I calculate that by the time they turned 50, they’d have around £152,000 (assuming the bonus rules didn’t change). That’s a significant amount of money.
Now, it’s worth pointing out that after 50, one can no longer contribute to a Lifetime ISA. And if one is using it for retirement savings, the capital can’t be accessed until age 60.
But if that £152,000 was left to compound for another 10 years at a return of 8% per year, it would grow to around £330,000. That could be a nice little bonus retirement pot next to one’s SIPP and/or Stocks and Shares ISA.
Obtaining 8% per year
How could one go about obtaining a return of 8% per year?
Well, one strategy that could potentially deliver this kind of return is investing in a global index fund such as the Vanguard FTSE All-World (Acc) ETF (LSE: VWRP). This fund – which could be worth considering as a long-term investment today – provides exposure to about 3,600 different stocks, including all the big names such as Apple, Amazon, and Nvidia.
Fees are low at 0.22% per year (you’d still have to pay platform fees most likely), which is good. Meanwhile, all income from the portfolio holdings is reinvested, meaning one can take advantage of the power of compounding (earning a return on previous returns).
It’s worth noting that over the last five years, this ETF has returned about 65%, which translates to about 10.5% per year. However, past performance isn’t an indicator of future performance and returns could be significantly lower if there was a meltdown in the economy and/or stock market.
I’d expect long-term returns to be more like 8%-9% per year. This assumes no huge swings in the value of the British pound.
Individual stocks for higher returns
I’ll point out that I’m a big fan of index funds like this. I see them as ideal ‘core’ holdings.
But I like to invest in individual stocks as well. Stocks are riskier than index funds, but they can offer the potential for higher returns.
Just look at Amazon (which could be worth considering today while it’s well off its highs). It has returned about 25% per year over the last decade meaning long-term investors have made a lot of money.
