Via Yahoo Finance

The Lifetime ISA has been surprisingly unpopular since its launch a couple of years ago. Despite offering a government bonus of 25% of all amounts invested per year, their subscriptions are dwarfed by Cash ISAs.

However, even though there’s been a low uptake thus far, Lifetime ISAs could be a worthwhile means of improving an individual’s chance of retiring early. Here’s how they work, and why they could be appealing to a wide range of people.

How they work

The annual allowance for a Lifetime ISA is £4,000. For every £1 invested, the government pays a bonus of £0.25. This means that it’s possible to obtain a government bonus of £1,000 per year. Since it’s available for anyone aged 18-50, it’s possible to generate a total bonus of £33,000 during a lifetime.

As well as a government bonus, Lifetime ISAs also offer significant tax advantages. They’re not subject to capital gains tax, income tax or dividend tax. It’s also possible to withdraw any amount invested in order to purchase a first home, while withdrawals for any other reason must be undertaken only after the age of 60 in order for a 25% penalty to not be applicable.

As with a Stocks and Shares ISA, a Lifetime ISA is straightforward to open online, while the charges for its upkeep are generally low. As such, it’s a simple means of benefitting from tax advantages, while also receiving a government bonus.

Investment potential

Investing £5,000 (including the government bonus) per year in a variety of shares could lead to a significant nest egg by the time an individual reaches retirement. For example, the FTSE 100 has recorded an annualised total return of around 10% in the last decade. Assuming a lower rate of growth over a long-term time period, such as 7% per annum over 50 years, could mean an individual has a seven-figure nest egg by the time they retire.

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Even for those who are unable to invest the maximum allowance of £5,000 per year, it’s still possible to benefit from the government bonus to some degree. And since a Lifetime ISA offers more flexibility in terms of withdrawals than a pension, it may be more appealing to younger people who are yet to purchase their first home.

Therefore, a Lifetime ISA appears to be a worthwhile product to use in order to improve an individual’s retirement prospects. Even after the FTSE 100’s recent rise since the start of the year, the index appears to offer good value for money. In fact, a number of stocks in a variety of industries seem to offer wide margins of safety.

As such, now could be a good time to start investing through a Lifetime ISA – even if it continues to be unpopular compared to other products such as a Cash ISA.

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Motley Fool UK 2019