Lifetime ISAs and Stocks and Shares ISAs are tax-efficient accounts that could increase your chances of becoming a millionaire. Dividend tax and capital gains tax are not levied on any capital invested through either account, which could mean they are able to produce higher returns than a bog-standard sharedealing account in the long run.
Government bonus
Where the two accounts differ, though, is with regard to the availability of a government bonus. For every £1 invested in a Lifetime ISA, the government pays a bonus of £0.25. Since up to £4,000 can be paid into a Lifetime ISA each tax year, this means that a £1,000 annual bonus could be available. With this on offer over a 33-year time period (the government bonus is paid from age 18 until an individual reaches 50 years old – at which point no further contributions can be made into a Lifetime ISA), there is an additional £33,000 in bonuses on offer.
By contrast, a Stocks and Shares ISA doesn’t have a government bonus. As such, an investor who’s between the ages of 18 and 39 (and is therefore eligible for a Lifetime ISA) may wish to pay their first £4,000 per year into a Lifetime ISA before contributing to a Stocks and Shares ISA. Doing so could provide them with up to £33,000 in bonuses over their lifetime.
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Return potential
The impact of the government bonus on an individual’s financial prospects could be significant. For example, an individual who has £4,000 to invest in the FTSE 250 each year and does so between the ages of 18 and 50 could have a nest egg of £2.1m by the time they are aged 60. This assumes they obtain an annualised total return of 9% (which is in line with the FTSE 250’s total returns in the last 20 years), and they don’t make any withdrawals until they’re aged 60.
By contrast, investing £4,000 per year in a Stocks and Shares ISA between the ages of 18 and 50 would produce a nest egg of £1.7m by the age of 60. As such, while an additional £1,000 per year in government bonuses may not seem to be all that significant, the impact of compounding over a long time period could mean it has a major impact on your financial position.
Drawbacks
Of course, a Lifetime ISA is more restrictive than a Stocks and Shares ISA. As mentioned, contributions to the former cannot be made after age 50, while withdrawals are subject to a 25% penalty if undertaken before age 60, or used for any purpose other than the purchase of a first home. As such, a Stocks and Shares ISA is worth having in case capital is required before you retire.
However, a Lifetime ISA could offer significantly greater returns in the long run. As such, it may be worth maximising your Lifetime ISA allowance in order to obtain the government bonus, and using a Stocks and Shares ISA for any additional capital that’s available to be invested in the stock market.
