Is a lifetime ISA the easiest way to make yourself a million?
Making a million from investing in shares has never been easy. Certainly, the FTSE 100 has delivered impressive returns since its inception in 1984. It has risen over seven times since then, with dividends boosting its total returns into the high-single-digits.
However, with the introduction of the lifetime ISA, things may have become easier for investors looking to generate a seven-figure nest egg. With a favourable bonus and relatively generous allowances, this could offer the chance to grasp millionaire status for a large number of people.
Details
The lifetime ISA is a relatively recent introduction to the world of investing. It was introduced in April 2017 and does not seem to have generated the buzz which it may deserve.
Anyone over the age of 18 and under the age of 40 can open a lifetime ISA. They can then contribute up to a maximum of £4,000 per annum to it, with any amounts paid-in being deducted from their overall £20,000 annual ISA allowance.
Deposits can be made up until the age of 50, when all contributions must end. Withdrawals can be made without penalty when an individual is above the age of 60, in the case of terminal illness, or if the funds are being used to buy a first home. If any of these three criteria are not met, there is a 25% charge for withdrawals.
While the withdrawal charge makes lifetime ISAs less appealing, this is largely offset by the bonus paid by the government. For every £1 paid into a lifetime ISA, the government will contribute £0.25. This means that an individual contributing £4,000 per year will receive a government bonus of £1,000 per annum.
Return potential
Assuming an individual opens a lifetime ISA on their 18th birthday, contributes £4,000 (plus the government bonus of £1,000) per year and invests in a FTSE 100 tracker, there is a very good chance that they will be a millionaire by the time of their 60th birthday.
This assumes that the FTSE 100 continues to deliver a total annualised return of around 9%, which it has achieved since its inception. It also assumes that no withdrawals are made, and that dividends are reinvested.
If those assumptions are met then an individual could have a nest egg of almost £2m by the time they are 60 years old. And with a contribution of £4,000 working out as a monthly amount of £333, accessing millionaire status in the long run may be available to a wide range of people in a variety of different circumstances.
Furthermore, for a younger person who is also considering how to pay for their first home, a lifetime ISA may be a sensible option. As mentioned, the funds can be used to purchase a first home, which means that they offer a degree of flexibility as well as high return potential.
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