Understanding LISA interest rates: a comprehensive guide
Understanding LISA interest rates is crucial for individuals looking to make informed d...
Luke Littler’s windfall
16-year-old Luke Littler earned £200k coming second in the Darts Championship. The tax man will take £83.7k of that leaving him with just £116.3k. That’s still a chunk of money though and he might be tempted to spend it on fast cars (once he’s old enough to drive).
But Luke could also take advantage of time in the market and stash his cash into investments. As Luke is very young, this money could be invested for up to 50 years to give him a fabulous retirement. If Luke invested his £116.3k for 50 years, his money would grow to a whopping £2.1m over 50 years (growth rate of 6%). As the table below shows, the longer you are in the market, the greater the growth.
| After-tax cash sum | Interest rate | Years | Final amount |
|---|---|---|---|
| £116,300 | 6% | 10 | £181,575 |
| £116,300 | 6% | 25 | £461,210 |
| £116,300 | 6% | 50 | £2,142,264 |
| With pension relief | |||
| £143,300 | 6% | 10 | £229,130 |
| £143,300 | 6% | 25 | £850,780 |
| £143,300 | 6% | 50 | £5,097,297 |
However, by sticking 60k into a pension (the maximum annual contribution), Luke could reduce his tax to just £58k, giving him a whopping £143.3k to invest. That’s because the Government gives you tax relief on annual pension contributions of up to £60k, which for Luke is essentially cashback of £27k.
The £27k difference is small, but over time it adds up. Over 50 years, it means that Luke’s investment more than doubles from £2.1m to £5m. But even over 25 years, he gets £851k, the £27K earning him an additional £390k over the 25 years. So, the moral of the story is therefore to invest as much as you can for as long as you can.
We’ve made these calculations based on a standard 6% annual return. However, investment performance can vary greatly from year to year and do not grow in a straight line. The FTSE All World Index was up 28% and the S&P 500, 25% in 2023. As such, the potential investment returns could be considerably lower or higher than the numbers shown. What matters is time in market as this will smooth out any short-term volatility.
Photo by thamerpic on Canva
