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Yahoo
3 days ago
- Business
- Yahoo
Lifetime ISA vs personal pension: Which is better for higher retirement income?
If you don't qualify for an employer pension, or you're looking for a way to supplement yours, both a Lifetime ISA and a personal pension, such as a SIPP (a self-invested personal pension), can be effective retirement planning tools. They have a lot in common: they're both tax-efficient, they hold a similar range of investments - Lifetime ISAs are a little more restricted - and most compellingly, contributions to either are topped up by 25 per cent, albeit in different ways. At first glance, it may seem that you could pay the same amount into one or the other and they would deliver an equal income in retirement. This isn't the case. Let's look at which could provide a higher income for you, and why. Which allows you to save more? A Lifetime ISA allows you to pay in up to £4,000 each year from the age of 18 until you turn 50. If you paid in the maximum each year, the total would be £128,000. You must open one before age 40. Contributions count towards your overall ISA allowance. Pensions usually allow you to pay in a lot more, and you can pay in for longer. Various limits apply in different circumstances, but the standard annual allowance is £60,000. Which offers a better 'bonus'? When you make a contribution into a Lifetime ISA, the government adds a 25 per cent bonus. So, if you pay in £800, the government bonus will be £200. You can read more on LISAs here. Pension contributions don't benefit from a bonus, but they are eligible for tax relief, which has a similar effect. If you make a contribution of £800 into a personal pension, your pension provider claims and adds £200 from HMRC (the equivalent of basic-rate income tax). If you're a higher-rate or additional-rate taxpayer, you'll be entitled to more tax relief. This won't be claimed by your pension provider but you can claim it back through your self-assessment. (Getty Images) Which can be accessed first? You can freely access the wealth within your Lifetime ISA after the age of 60. Before that age, you can access it in two scenarios: You're buying your first home, at a value of no more than £450,000 You pay a 25 per cent withdrawal charge. Note that the 25 per cent withdrawal charge does not equal the bonus, but actually exceeds it: If you pay in £800, you'll receive a bonus of £200, giving you a total of £1,000 If you now withdraw £1,000, you'll pay a penalty of £250 (25 per cent of the total) You'll have £750 remaining, leaving you £50 worse off. Pensions usually cannot be accessed before the age of 55 (rising to 57 in April 2028) unless you have a serious health condition. It can be a more complex process. How is the income from each taxed? Here is, perhaps, a Lifetime ISA's most appealing characteristic: money withdrawn from them isn't considered income, so it won't be taxed. After the age of 60, you can take as much cash as you like, until it runs out, and you won't pay a penny of it to HMRC. Pension income can be taxed in various ways. A more full explainer is here but to simplify, you can usually take 25 per cent of your pension tax-free, while the other 75 per cent is taxed as income as and when you take it. You might therefore pay tax at 20, 40 or 45 per cent, depending on your other income. Which will provide a higher income? As you've probably gathered, this is a question of the trade-off between the tax relief (or bonuses) you'll receive while saving and the tax you'll pay (or not) when withdrawing. (Getty Images/iStockphoto) A personal pension is usually the better choice for higher-rate and additional-rate taxpayers. The tax relief on your pension contributions, at 40 or 45 per cent, more than offsets the tax you'll pay on your pension income, particularly if you move into a lower tax bracket after you retire. For a basic-rate taxpayer, the reverse is true. Let's look at an example: If you saved up £100,000 over your working life, whether you used a Lifetime ISA or personal pension, you would end up with £125,000 (we'll ignore investment growth to keep things simple). With a Lifetime ISA, you could withdraw this amount over any period, after the age of 60, without paying tax. You'd be able to take the full £125,000. With a personal pension, only 25 per cent (£31,250) would be tax-free. The remaining £93,750 would be taxed as it's withdrawn. If you withdrew it over several years, remaining a basic-rate taxpayer throughout, the total tax would be £18,750. Of your £125,000, you'd only get back £106,250. While this gives a clear advantage to the Lifetime ISA, there are other factors to consider: With an annual limit of £4,000 on contributions, a Lifetime Isa alone may not allow you to save enough as you need for retirement Since you can't access your Lifetime Isa penalty-free until 60, you may have to wait longer to retire You can only pay in until you turn 50, while you might want an option you can pay into after this. Given all the benefits and drawbacks, you may decide that both products have a role in your retirement plan - especially given there may be changes to the Lifetime ISA in to access your portfolio
Yahoo
3 days ago
- Business
- Yahoo
See how much a 50-year-old should invest to get a £1k monthly passive income at 65
For many investors, generating a passive income is the number-one goal. Their dream is to create the financial freedom to grow in later life, and to devote more time to something other than working flat out. At 50, retirement feels a lot closer than it did at 40. There are fewer working years left to build wealth, and less time to recover from any nasty market shocks. But there's still a decent window of opportunity. Running the numbers To target £1,000 a month of passive income by age 65, based on a 6% average dividend yield across a portfolio of FTSE 100 dividend income stocks, would require a pot of around £200,000. Assuming 7% average annual growth, a 50-year-old would need to invest around £700 a month for the next 15 years to achieve that. In fact, they'd get £225,000 which is even better. It's a stretch for many at this stage of life. However, if they invest via a Self-Invested Personal Pension (SIPP) they can claim tax relief on contributions. This would cut that £700 to just £560 a month for a 20% taxpayer, or £420 for a 40% taxpayer. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions. I'd favour building a balanced portfolio of solid dividend income shares and holding on through thick and thin. One familiar name that income investors might consider buying is Rio Tinto (LSE: RIO). Dividends dig deep The global miner hasn't had an easy run. The share price is down more than 15% over 12 months, and 8% over five years. That reflects slowing demand from China, which is still struggling to reboot its economy, while the rest of the world flirts with recession. Despite that, the dividends have kept flowing. In 2024, Rio paid out $6.5bn to shareholders, maintaining a 60% payout ratio. The trailing yield now sits at just over 7%, one of the most generous on the FTSE 100. However, it's expected to fall to 5.85% this year. The stock looks cheap, trading at a price-to-earnings ratio of 8.88. On 19 February, it reported underlying 2024 earnings of $23.3bn and net cash flow from operations of $15.6bn. Profit after tax came in at $11.6bn. Shareholder rewards Rio's acquisition of lithium producer Arcadium should add diversification. Reports suggest incoming CEO Simon Trott could also explore major M&A opportunities, while sharpening productivity and cutting costs. There are risks. Global demand for metals may stay weak as global struggles continue. Miners face constant operational threats too. In May, Rio warned that iron ore shipments at its flagship Pilbara operation in Western Australia could come in at the lower end of forecasts, due to weather disruption. But a portfolio that includes stocks like Rio, mixed with defensive dividend payers and long-term growth plays, could potentially deliver that 6% average yield. Combined with compound growth, that's a realistic route to generating a £1,000 monthly passive income by age 65. With 15 years to go, there's not a second to lose. But with the right strategy and enough discipline, there's still time to build a serious second income. The post See how much a 50-year-old should invest to get a £1k monthly passive income at 65 appeared first on The Motley Fool UK. More reading 5 Stocks For Trying To Build Wealth After 50 One Top Growth Stock from the Motley Fool Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Motley Fool UK 2025 Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
4 days ago
- Business
- Yahoo
If a 30-year-old puts £500 a month into a Stocks and Shares ISA, they could have £2.3m at retirement!
Investing in a Stocks and Shares ISA is arguably the most effective way to build wealth in Britain. And starting early allows young investors to maximise the rewards. In fact, a 30-year-old investor planning to retire at the age of 67 could become a multi-millionaire with just £500 a month. Here's how. Retiring with £2.3m in the bank The average return generated from the stock market varies depending on what investments are made. But here in the UK, that return's typically sat between 8% for large-caps and 10% for small-caps annually over the last 30 years. For someone who's just turned 30 and has no savings, securing that upper rate of return with a £500 monthly investment will grow to £2.3m when compounded over 37 years. And for those earning enough to maximise their annual ISA allowance (£1,667 a month), their retirement wealth could be a staggering £7.8m! And unlike when using a Self-Invested Personal Pension (SIPP), that money can be withdrawn all at once with zero taxes to pay. Of course, in practice, consistently earning a 10% annual return isn't easy. In fact, even when relying on an index fund, some years will be far better than others. And similarly, over a 37-year time span, chances are an investment portfolio will go through multiple corrections and crashes that could leave investors with less money than expected come retirement. Nevertheless, even earning half of this amount still leaves someone with over £1m in the bank – more than enough to live comfortably by today's standard. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions. Earning a 10% return with small-caps Investing in small-cap stocks opens the door to superior returns. But the small size of these businesses can also make them far more volatile and sensitive to external disruptions. In other words, aiming for a 10% return with this class of equities is a riskier endeavour compared to investing in boring FTSE 100 companies. Nevertheless, there is a wide range of promising opportunities to capitalise on right now. One stock that might have the potential to outperform in the long run is dotDigital Group (LSE:DOTD). The digital marketing platform allows small- and medium-sized businesses to automate their marketing campaigns and use artificial intelligence (AI) predictive analytics to maximise engagement. It's a tool that's proving particularly popular among e-commerce stores, resulting in the average revenue per customer quadrupling over the last decade. Unfavourable product mix with SMS contracts has resulted in margin compression. However, with management refocusing the mix toward maximising profitability, margins are expected to start recovering in 2025. And with the fundamentals now catching up to its previously lofty valuation, the stock's recent flat performance may soon improve. What could go wrong? Seeing new and existing customers spend more money each year is an encouraging sign. As is the group's impressive free cash flow generation, something that's rare for a small-cap stock. However, that doesn't make it a guaranteed winner. Despite my bullish stance, there are still some notable risks and challenges to consider. The digital advertising market is highly competitive with a lot of rivals sitting on big cash war chests. And so far, the group's progress regarding its expansion into international markets like Japan have been underwhelming. Nevertheless, if dotDigital can overcome these hurdles, the investment returns could be a further-research candidate as it may prove helpful in growing a Stocks and Shares ISA towards millionaire territory. The post If a 30-year-old puts £500 a month into a Stocks and Shares ISA, they could have £2.3m at retirement! appeared first on The Motley Fool UK. More reading 5 Stocks For Trying To Build Wealth After 50 One Top Growth Stock from the Motley Fool Zaven Boyrazian has positions in Dotdigital Group Plc. The Motley Fool UK has recommended Dotdigital Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Motley Fool UK 2025
Yahoo
4 days ago
- Business
- Yahoo
3 cheap dividend stocks I bought for a lifetime of passive income
While I'm still decades away from retirement, I've begun planning ahead and loading up my Self-Employed Personal Pension (SIPP) with top-notch UK dividend stocks. But rather than focusing on the shares offering the highest yields today, I'm hunting the companies capable of hiking dividends for years and decades to come. Opportunities in commercial real estate In a higher interest rate environment, real estate investment trusts like LondonMetric Property (LSE:LMP) and Safestore (LSE:SAFE) haven't received a lot of love from investors. In fact, over the last five years, both landlords have seen their valuations slide by around 10%. And yet in both cases, dividends have continued to climb. The growth drivers for these businesses are a little different. LondonMetric receives a good chunk of demand from the e-commerce sector with many tenants renting out warehousing space. On the other hand, Safestore is predominantly driven by consumer demand, which has waned in recent years, particularly due to a slowdown in home renovation projects. However, even in a weakened environment, both businesses remain highly cash generative, enabling impressive resilience to external pressure. LondonMetric, in particular, has proven that even during a market downturn, it can continue to grow earnings at a double-digit pace and use that strength to snap up smaller, struggling rivals. As for Safestore, while earnings growth has been tougher to achieve, it's still expanding its territory in Europe, positioning itself for when market conditions eventually recover. And given that the European self-storage industry is still in its infancy, an enormous long-term growth opportunity exists to grow its cash flows and, in turn, dividends. That's why, despite the risks, both dividend stocks are already in my income portfolio. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. International exposure Another cash-generative enterprise that's been lacking some love lately is Somero Enterprise (LSE:SOM). The firm's the global leader in laser-guided concrete levelling, contouring, and placing machines. While it's hardly the most exciting business out there, it's proven to be an essential player in the non-residential construction sector, especially in North America. Beyond the benefits of geographic diversification, Somero's seeking to capitalise on the enormous infrastructure spending plans by the US government over the coming years. And with an impressive line-up of new screed machines being launched throughout 2025, Somero's maintaining its top-dog status. Sadly, the global construction market isn't in an ideal spot. With higher interest rates, large-scale projects have been put on hold, lowering demand for the firm's machines. And consequently, revenue growth in countries like Australia has been hit hard. That's obviously frustrating. But this isn't the first time management has had to navigate through cyclical downturns. And with $29m of cash on its balance sheet with virtually no debt, its financial health remains in tip-top shape, as is the dividend. And with a yield of 6.9% on offer today, it's a dividend stock that investors may want to consider investigating further, despite the challenges. The post 3 cheap dividend stocks I bought for a lifetime of passive income appeared first on The Motley Fool UK. More reading 5 Stocks For Trying To Build Wealth After 50 One Top Growth Stock from the Motley Fool Zaven Boyrazian has positions in LondonMetric Property Plc, Safestore Plc, and Somero Enterprises. The Motley Fool UK has recommended LondonMetric Property Plc, Safestore Plc, and Somero Enterprises. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Motley Fool UK 2025 Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
13-07-2025
- Business
- Yahoo
If a 50-year-old puts £500 a month into a SIPP, here's what they could have by retirement
Building retirement wealth in a Self-Invested Personal Pension (SIPP) is a proven strategy to secure a more comfortable pensioner lifestyle. Even when starting later in life, say at the age of 50, it's still possible to build a substantial nest egg. But what does that mean in terms of money? Let's explore just how much richer older investors can expect to realistically become before retirement with only £500 a month. On average, the UK stock market's delivered a long-term total annualised return of around 8% a year when looking at large-caps. And for the investors willing to take on more risk and volatility, small-caps have outperformed slightly at around 11%. Let's say that a 50-year-old investor today intends to retire at the age of 67. Assuming these growth trends continue in the future (which they may not), investing £500 each month for 17 years would net a portfolio worth anywhere between £215,900 and £296,400. However, this calculation forgets one crucial advantage of using a SIPP – tax relief. Assuming the same investor's sitting in the Basic rate tax bracket, each £500 deposit is automatically topped up to £625, thanks to tax relief. And when factoring this into the calculation, a SIPP portfolio could actually grow to between £269,900 and £370,500. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions. Building up to £370,000 to retire on is certainly nothing to scoff at. But that's all dependent on making smart investment decisions. After all, investing isn't risk-free. And a badly built portfolio could very easily destroy wealth instead of creating it. Investors need to look exclusively at top-notch businesses, with promising long-term potential, while also trading at a reasonable price. Sadly, this trio of requirements isn't always easy to find, requiring a lot of patience and diligence. And it's why stock picking can be such a challenging task. But when executed correctly, the rewards can be enormous. Take Goodwin (LSE:GDWN) as an example. The engineering group's now a prominent industry leader offering high-integrity solutions to the defence, mining, energy, aerospace, and even jewellery industries. But that wasn't always the case. And management's ability to diversify, maintain a strong order book, and deliver consistent growth is what enabled the stock to climb 1,750% in the last 20 years. On an annualised basis, that's the equivalent of 15.7% a year. And it's enough to turn a £625 monthly investment into £630,000 over a period of 17 years. Obviously, not every British stock has been so fortunate. Nevertheless, it goes to show the game-changing benefits that prudent investing can deliver. There are still some encouraging traits that make it a business worth considering today. Its order book continues to reach record highs courtesy of new nuclear decommissioning and naval vessel contracts. In fact, these deals have enabled operating profits to surge by 45% in its latest interim results. And so, despite its larger size, management continues to find ways to deliver rapid revenue and earnings growth as a sector leader. However, even the most promising enterprises have their weak spots. Most of the group's revenue stems from large contracts, which can be difficult to replace quickly. As such, cash flows have been pretty lumpy over the years – a trend that's unlikely to change. And at a price-to-earnings ratio of 30, that can open the door to volatility. The post If a 50-year-old puts £500 a month into a SIPP, here's what they could have by retirement appeared first on The Motley Fool UK. More reading 5 Stocks For Trying To Build Wealth After 50 One Top Growth Stock from the Motley Fool Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Goodwin Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Motley Fool UK 2025 Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
