From an absolute return viewpoint, the best investment vehicle is without doubt, an employer-funded workplace pension.
Employers must contribute at least 3% of an employee’s salary, with the total minimum contribution (made up of employer and employee contributions) being 8%. For an employee contributing 5% of their salary, the result is that the employer is effectively boosting their pension pot by another 60%.
The downside is that withdrawals from private pensions can’t be made until 55 years of age and are subject to taxation. Equally, the self-employed and lower earners may not have the benefit of employer contributions.
The Lifetime ISA (LISA) is the next best option
Open to those aged between 18 and 40, the LISA allows us to save and invest up to £4k a year, tax-free, until the age of 50 (meaning we can contribute up to £128k). But the best bit about the LISA is that the government add to this with a 25% bonus every year. This means that if we pay the maximum of £4k a year into a LISA, we get an additional £1k bonus.
There are some restrictions, though. Funds can only be withdrawn to buy a first home, or when we are 60 years old. So, the LISA is only appropriate for those looking to get onto the property ladder, or those wishing to save for retirement.
Nevertheless, apart from employer pension contributions, there is no other investment or savings scheme that comes even close to this. In the investment world, a 25% risk-free return is simply unheard of and almost too good to be true.
Over the full life of a LISA, the government would contribute a maximum of £32k (£1k a year for 32 years). For those saving for a first home and maxing out the £4k contribution limit, the government would have provided an extra £5k after 5 years – which is certainly not to be sniffed at.
The table below, however, shows that the true benefit from the bonus is realised when the funds are invested into the stock market, and allowed to compound at a higher rate (in this case at 5% after inflation).
|
Value of £4,000 invested annually (£s) |
||
|
Years |
Without bonus |
With bonus |
|
1 |
4,200 |
5,250 |
|
5 |
23,207 |
29,009 |
|
10 |
52,827 |
66,033 |
|
20 |
138,877 |
173,596 |
|
32 |
316,255 |
395,318 |
|
50 |
761,105 |
951,379 |
When invested into the stock market, that £128k of maximum contributions comes close to £400k after 32 years (i.e., at 50 years old), representing an impressive gain of over 200%. Meanwhile, those saving for a first property would have £29k after five years, from just £20k of contributions. By combining two separate LISAs, couples can benefit even further, potentially doubling their bonus.
But it’s not just first-time buyers that benefit. I think it’s also a very good option for anyone that doesn’t have a company pension.
For those that are saving to get onto the property ladder and those that do not have an employer-funded workplace pension, I would recommend sticking to FTSE 100 mega-caps and the big dividend payers in particular, like IAG and Lloyds. These blue-chip household names are generally the safest stocks to own, and so are perfect for those that are investing with a clear goal in mind.
For investors that are looking for higher returns and don’t mind taking on a bit more risk, I’d recommend looking at growth stocks, which could exponentially increase in value. The only thing left to do is pick what stocks to invest in, and that’s the fun part!
