Is a lifetime ISA the best way to invest in the FTSE 100?
While the FTSE 100 is trading close to an all-time high, its investment potential still seems to be sound. A growing world economy, potential sterling weakness from Brexit and a dividend yield of 3.8% all point to further growth for the index. As such, now could be the right time to buy stocks which trade within it.
However, investors have a wide range of options on how they go about investing in the FTSE 100. There are lifetime ISAs, pensions and sharedealing accounts, for example. Which one is the most appealing for the long term?
Tax treatment
The main advantage of a pension is that amounts paid into it are not subject to tax. In practice, this means that a basic rate taxpayer who invests £80 of their net salary in their pension will see that amount receive a government 'top-up' of £20. The attraction of this favourable tax situation is obvious. While tax is payable on withdrawals, these will be made during retirement. As a result, they can be offset against a personal allowance, while 25% can be taken tax-free as a lump-sum from the age of 55.
Lifetime ISA contributions are made from after-tax income. However, for every £80 contributed to a lifetime ISA, the government will add a £20 bonus. This is up to a maximum of £4,000 in contributions per year up to the age of 50, meaning there is a potential bonus of £1,000 per year available to investors. Unlike a pension, any amounts withdrawn from a lifetime ISA are tax-free, provided they are withdrawn at age 60 or over.
Flexibility
A lifetime ISA provides greater flexibility than a pension. Once capital is committed to a pension, it cannot be withdrawn until age 55. Capital in a lifetime ISA can be withdrawn at any point, but there is a 25% penalty for doing so.
This, though, is not as severe as it sounds, since a 20% government bonus will already have been applied to amounts invested. And if an individual wishes to use the money in a lifetime ISA as a deposit for their first home, there is no withdrawal penalty. As such, for younger investors, a lifetime ISA seems to make sense. The money can be accessed in case of emergency, while it can also be used to get onto the property ladder.
Accessibility
Both pensions and lifetime ISAs are relatively straightforward to set up. While there are costs associated with the administration of both products, they are relatively affordable even for a smaller investor. Since they both offer favourable tax treatments, they seem to be a better means of accessing the FTSE 100's growth potential than a bog-standard sharedealing account.
With lifetime ISAs available to anyone under the age of 40, they seem to be a simple means of planning for retirement or even your first home. After all, a government bonus of up to £1,000 per year would be very well-received by any investor.
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