3 reasons why a Lifetime ISA could boost your retirement savings

Retirement saving and pension planning
Retirement saving and pension planning

With 1.8m pensioners in the UK reportedly living in poverty, planning for retirement should be a priority for adults of all ages. Fortunately, the government has made it easier in recent years to generate a sizeable nest egg for retirement which can be used to supplement the State Pension.

The Lifetime ISA (or LISA) is a major improvement on the bog-standard ISA, and could even be more attractive than a pension for many people. Here are three reasons why contributing to a Lifetime ISA could help you to plan for older age through boosting your retirement savings.

Government bonus

Perhaps the most appealing facet of the Lifetime ISA is the government bonus. This is payable on all contributions up to £4,000 per year, and means that the government will add a 25% bonus to all savings until an individual is 50. Assuming that a person opens a Lifetime ISA on their 18th birthday, this means that they could receive up to £32,000 in government bonuses through their lifetime.

Clearly, contributing £4,000 per year as a younger person (or at any age) may not always be possible. However, even if a smaller sum is invested each year, the government bonus remains highly appealing. It could make a real difference to the standard of living which is available to an individual in retirement.

Tax shelter

A Lifetime ISA also provides an investor with a tax shelter which could help to improve their overall returns. Any amounts invested in shares or other assets through the product are not subject to capital gains tax, nor does the income from dividends count towards an individual's tax allowance.

This means that amounts invested via the LISA will offer improved return potential versus those of a standard share-dealing account. In recent years there have been calls for higher rates of capital gains tax to be introduced by various politicians. Alongside the continued rise in taxes paid on dividends under the current government, a Lifetime ISA could become more appealing from a tax avoidance perspective given the political risk faced by all investors.

Low costs

While a LISA provides a government bonus and tax advantages versus a standard share-dealing account, its costs are minimal. In fact, it is free to set-up such a product at most providers, while an administration charge is usually the same or marginally higher than for a share-dealing account. As such, higher charges are unlikely to eat away at returns.

Furthermore, the cost of buying and selling shares has continued to fall in recent years. It is now possible for small investors to take advantage of aggregated share purchases, where their orders are joined with those of other investors on a weekly or fortnightly basis. This can reduce costs to less than £2 per trade at many providers, and means that Lifetime ISAs really are available to any UK adult under 40 who wishes to plan for retirement, even those without a lot of cash to spare.

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