Thinking of investing in a Lifetime ISA? You really need to read this

A Lifetime ISA could provide a sweet spot when it comes to building retirement savings.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Planning for retirement is never easy. There are a huge number of unknowns ahead, and it’s difficult to know how much to save, where to invest it, and how much will be required in retirement.

One of the problems with a pension is that it’s inflexible. If an individual saves into a pension, then they are unable to access any of the money until they are at least 55. For a younger person looking to build a nest egg for retirement at the same time as buying a property and coping with a variety of other costs throughout life, this can make them relatively unappealing.

As a result, a Lifetime ISA could be a worthwhile option. It seems to offer a mix of flexibility and high-return potential.

Should you invest £1,000 in 3i Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if 3i Group Plc made the list?

See the 6 stocks

Return potential

A Lifetime ISA can be opened by any individual between the ages of 18 and 40. A maximum of £4,000 can be invested into the product per tax year, with any amounts paid in coming from after-tax income. This is different than a pension, where contributions are from before-tax income. As a result, it may seem as though a Lifetime ISA lacks the tax avoidance appeal of a pension.

However, for every £1 that is invested in a Lifetime ISA, the government will contribute a £0.25 bonus. This means that if an individual invests £4,000 through the product, the government will top-up the amount so that it reaches £5,000 per year. This helps to offset the potential tax advantage which a pension offers.

Furthermore, there is no capital gains payable on profits generated within a Lifetime ISA. While this may not seem to be of great importance at the start of an individual’s retirement-planning journey, in later years it could become increasingly worthwhile as a nest egg grows in size.

Flexibility

A Lifetime ISA also provides much greater flexibility than a pension. All contributions can be withdrawn at any time, but will be subject to a 25% charge. Any amounts withdrawn after the age of 60, though, are not subject to a penalty. And since income tax has already been paid on contributions, there will be no related tax to pay on withdrawals. This is markedly different to a pension, where 75% of withdrawals are subject to income tax.

A Lifetime ISA can also be used to fund the purchase of a first home. No penalty is levied if withdrawals are used for this purpose. This provides a younger person with the flexibility to plan for retirement, but to also benefit from the government bonus should they decide to use the money for a property purchase. In contrast, contributions to a pension cannot be withdrawn until an individual is at least 55 years old.

Outlook

While the Lifetime ISA has not proved especially popular since its launch, it seems to offer a sound mix of return potential, tax benefits, and flexibility. Therefore, for investors aged under 40, it could be a worthwhile method of building a retirement savings pot.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »