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Perhaps it is because of the name, Lifetime ISA, but somehow the investment vehicle does not clearly convey a sense of urgency to me.
In fact, there is some urgency: a Lifetime ISA cannot be opened once one reaches 40.
At 25, 40 might seem a long way away. Additionally, at 25, one might not think too much about investing in a Lifetime ISA – or have the means to do it.
That said, delaying this even by a decade can have very significant consequences, long term.
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Massive opportunity cost
To illustrate, an investor could consider investing £500 per month in a Lifetime ISA starting at 25 and aiming to compound its value by 8% annually. By the time they hit 60, if that target is hit, their ISA ought to be worth £1.1m.
But what if, instead, they start at 35, not 25? That is still younger than many people even think about starting to invest, after all.
That is true, but come 60, that Lifetime ISA will be worth under half a million pounds. Still a lot of money, yes, but a far cry from £1.1m just for the sake of starting one decade later!
That is because of the power of compounding – basically money that has already been earned itself earning more money. Compounding can be the friend of the long-term investor. As Warren Buffett’s career demonstrates, even across many decades, another 10 years of compounding can have a surprisingly large effect on total returns.
Finding shares to buy
In that example, I used an 8% compound annual growth rate. Over the long term, any given share may do better or worse.
One share I think investors should consider for a Lifetime ISA (or indeed any type of ISA) is asset manager M&G (LSE: MNG).
At the moment, M&G has a dividend yield of 9.8%. Management also has the stated aim of maintaining or growing the dividend per share each year.
Does that equate to an 8% compound annual growth rate?
Not necessarily. Dividends are never guaranteed and one risk I see to M&G is investors pulling out more money than they put in (as happened in the core part of its business in the first half). Also, a compound annual growth rate reflects share price movements as well as dividends. Over the past five years, the M&G share price has fallen 9%.
But with a strong brand, large customer base, and proven business model, I continue to believe that M&G has a strong future ahead of it.
The company has proven in recent years that not only can it generate sizeable excess free cash flows but that it is willing to distribute them to shareholders. As well as a sizeable share buyback, it has been raising its dividend each year.
