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Many investors contribute to a Stocks and Shares ISA to receive income from the stock market. As there is no tax on gains from investments held in an ISA, it is a great way to boost returns.
However, for small investors, there is another wrapper that is more attractive. I'm talking about the Lifetime ISA, which has the benefit of a government bonus of 25% on contributions. Good!
Here's how a Lifetime ISA works and why I think qualified investors should consider opening one to speed up progress towards their income ambitions.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Lifetime ISA
Investors can open a Lifetime ISA before they turn 40. After this, they can continue to donate until they are 50 years old. Contributions are up to £4,000 per tax year and the government adds 25%. For top bidders, that's an extra £1,000.
If money is used to buy shares within a Lifetime ISA, those investments will fluctuate in value. Guaranteed government bonus applies to initial contributions.
Whole life ISAs have limitations. They are popular with first-time buyers as withdrawal penalties do not apply if you buy your first home for £450k or less.
However, their potential as income vehicles for retirement has been overlooked. Those aged 60 and over can also withdraw from a stock market portfolio with a penalty-free Lifetime ISA.
To increase my income potential
To show how beneficial this can be, let's do an example of the result. In the calculations below, I assume that my portfolio grows at 8% annually and that I will receive a 5% yield on all my dividend stocks.
From 18, if I invest £4,000 a year in a Stocks and Dividends ISA, here's what my portfolio will look like when I'm 60.
| The ultimate portfolio | Annual income |
|---|---|
| £1,314,332 | £65,717 |
If I contributed to a Lifetime ISA until I was 50 instead and used a Stocks and Shares ISA for the last decade, the figures look like this.
| The ultimate portfolio | Annual income |
|---|---|
| £1,627,270 | £81,364 |
Thanks to the compounded returns, I could earn an extra £15,647 in income every year without contributing a penny more than if I were already using a Stocks and Shares ISA.
Of course, share price growth is not guaranteed. In fact, I will not be able to achieve these goals if my stocks do not perform well or the companies I invest in reduce or stop dividend payments.
An investment idea
To achieve my goals, I will need to buy quality dividend stocks. One thing to consider FTSE 250-listed for investment AJ Bell (LSE: AJB). Currently, shareholders receive a yield of 2.6%.
The retailer's latest trading update was full of good numbers. A total of 528,000 customers are now using the platform – a 13% increase over the year. Assets under management increased by 20% to reach £83.7bn.
Achieving rapid growth in a highly competitive field is not a bad thing. The company's direct-to-consumer (D2C) strategy is bearing fruit.
It is also negotiating with the new Labor government to simplify Britain's ISA system. This would be useful across the board if chancellor Rachel Reeves proves herself to be right.
Admittedly, the yield is not very good and the price-to-earnings (P/E) ratio of 19.7 looks a little high, posing risks to the share price growth.
But overall, AJ Bell shares a good idea – perhaps with a Lifetime ISA offered by the company itself!
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