Using a Stocks and Shares ISA is a fantastic way to maximise your returns in 2021. Even £100 invested per month could make a big difference to your retirement nest egg.
Over a 25-year period, this amount, invested at the 8% rate of return the FTSE 100 has managed in recent decades, would produce a portfolio of around £87,700. A 5% yield would give you an annual income of around £4,300, a welcome addition to a state pension. When compared with the cash savings equivalent of £30,000 over the same period, the advantages of investing via an ISA are obvious.
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What is a Stocks and Shares ISA?
I’ve noticed some confusion around ISAs, but they’re far simpler than many people think. An ISA isn’t an investment in itself. It’s a tax-efficient wrapper. In the case of a Stocks and Shares ISA, it’s a wrapper for an investment account. The advantages to investing through one are twofold. Firstly, your dividends are tax-free, and secondly capital gains tax isn’t paid on any shares you sell.
Like any other stocks and shares investment, the value of your ISA will ebb and flow with the stock market and your choice of securities. This is why it makes sense to invest in stocks and shares for the long term. However, unlike many other investment accounts, such as a SIPP or high-interest cash savings account, you can make withdrawals from your ISA at any time and without a penalty. This means you always have access to emergency funds should you need them.
I think the best ISAs are those where you can choose whatever you want to put into them, rather than one that limits you to only picking funds from the company providing it. This is mainly because I like the flexibility of choosing my own shares and changing my investments to suit me, and not the fund provider.
So, what should I put in it?
Assuming I can pick my own stocks for my ISA, I like dividend stocks. The reason for this is the compounding benefit you get from reinvesting the dividends. In addition, the FTSE 100 currently offers many shares with dividends with 5%+ yields, far in excess of anything we’ll get in a cash account, even in a high-interest one. GlaxoSmithKline (LSE: GSK) is one example, currently yielding around 5.7%. A variety of such stocks will help protect investments from any losses too.
Moreover, with vaccines for Covid-19 on the way, it’s hoped that the economy will begin to grow again. Shares yielding dividends may have the future financial strength for increases in yields, improving returns even more.
Obviously, the more money you can invest per month, the better your nest egg is likely to be. But, even investing £100 per month in a Stocks and Shares ISA will make a difference and is a great way to maximise your potential returns throughout 2021.