Investing through a Stocks and Shares ISA is, in my opinion, one of the best ways to build wealth. Indeed, I make all of my investments in my ISA wrapper, although the amount I can invest is limited.
According to Stocks and Shares ISA rules, investors can only contribute £20,000 a year. This is a significant sum for most. According to data from HMRC, the majority of ISA investors do not even come close to this level.
Stocks and Shares ISA tax benefits
The great thing about using one of these wrappers is the fact that they are tax-efficient. Actually, they are tax-free. Any income or capital gains earned on investments held within an ISA wrapper is not liable for tax. Investors do not even have to declare the income on their tax returns.
The benefits of this tax advantage cannot be understated. At present, as a basic rate taxpayer, I have to pay 7.5% dividend tax on any dividend income over £2,000 a year. This rate is increasing to 8.75% next year.
Based on these figures, if I earn £5,000 a year in dividend income, I will have to pay 7.5% tax on £3,000. That is a total of £225 a year.
According to my calculations, £225 invested in an asset yielding 6% a year could be worth £1,000 after 25 years. This is based on my personal tax situation. Every investor should always check their own tax obligations before investing.
However, I think the figures clearly illustrate the benefits of using a Stocks and Shares ISA wrapper to invest. By using this approach, I am targeting a £100k financial nest egg.
The approach I plan to use to hit this target is relatively straightforward. I am using a combination of low-cost index tracker funds and high-quality stocks.
My goal is to target an average annual return of around 8%. This is slightly below the long-term average return of the stock market, which is around 10%. However, I am aware past performance should never be used as a guide to future potential. That is why I am targeting a lower rate of return.
The companies I have been buying for my Stocks and Shares ISA portfolio include AstraZeneca and Diageo. I think these are some of the highest quality corporations on the London market.
They have international footprints and diverse portfolios of products and treatments. Further, they can also spend substantial sums every year marketing their products to consumers, which gives them a competitive edge. That said, they will face risks such as competition and higher costs, which could put some investors off from owning these equities.
Alongside these stocks, I would also acquire the Fidelity Index World global index tracker fund.
Using this combination of investments, if I can hit my 8% per annum return target, I believe I can build a £100,000 Stocks and Shares ISA within eight years. That is assuming a monthly investment of £1,000. While there may be some bumps along the way, this is the approach I will be using to invest my money.
Rupert Hargreaves owns shares of Diageo. The Motley Fool UK has recommended Diageo. 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.