The annual ISA allowance is an opportunity to build passive income from investments in stocks and shares.
The allowance sets the amount we are allowed to save each year in a Stocks and Shares ISA. Currently, it’s £20,000. But the government can change the rules at any time. And future annual allowances may not be as high, or they may even be higher.
Tax advantages
But one thing I’m certain about is that investing in stocks and shares in an ISA is a good idea. The tax advantages are compelling. Dividends received on shares within an ISA are tax-free. And capital gains from shares aren’t taxed either. But on top of that, there’s no hidden catch when I finally withdraw money from an ISA. Indeed, the money taken out is completely free of income tax.
Those are attractive benefits. But income tax is payable in the normal way on money used to invest in an ISA. In other words, there’s no tax relief on the way there is with a Self-Invested Personal Pension (SIPP).
Nevertheless, I’m keen to put as much money as possible each year into a Stocks and Shares ISA. And although the limit is £20,000, I can choose to invest as much, or as little, up to that limit.
And, right now, the conditions for investing stocks and shares are among the best I’ve seen in my investing career. The recent bear market for many stocks has pummeled valuations and share prices. Yet many businesses have been reporting robust trading and optimistic outlook statements. And, on top of that, the general economic and geopolitical news has been improving.
Therefore, once the money is in my ISA, I’d begin investing it in shares straight away. And the goal of my strategy would be to earn passive income for life from shareholder dividend payments.
Building a larger investment pot
However, before drawing on dividend income, my investments need to grow. And that’s because I don’t require the income right now. But it will be handy later, perhaps in retirement. So, in the meantime, I’d reinvest all the gains and dividends in my portfolio with the aim of growing the value of my funds.
A bigger investment pot can lead to a bigger passive income later. Although positive outcomes are never guaranteed. Businesses can run into operational problems at any time. And it’s possible to pick the ‘wrong’ ones in the first place
Nevertheless, my strategy would have two parts. Firstly, I’d invest in a diversified range of index tracker and managed share funds. And the aim would be to match the performance of the general stock market.
In one example, America’s S&P 500 index has delivered compounded annual returns of around 10.5%. And that figure captures the performance of the index since the mid-1960s.
However, for the second apart of my strategy I’d invest in the shares of individual companies. And the aim would be to beat the performance of my fund and tracker investments.
Positive outcomes aren’t certain. But I’d aim to mitigate some of the risks by conducting thorough research before buying my stocks.
