53% of British adults could be making a huge ISA mistake

A lot of Britons today are missing out on the opportunity to build tax–free wealth because they don’t have an ISA account set up.

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According to research from insurance company Shepherds Friendly, around 24m British adults don’t currently have an ISA. That equates to around 53% of the adult population.

As someone who likes helping others learn more about creating wealth, I’m a little concerned by this statistic. Because here in the UK, putting money into ISAs is one of the best ways to build long-term wealth.

ISA advantages

ISAs have a number of benefits. For starters, there are the tax benefits.

With most of these products, £20k can be invested a year with all the funds sheltered from the tax man. In other words, all income and capital gains are completely tax-free. That’s a huge perk. Especially now that the Capital Gains Tax (CGT) allowance is just £3k a year.

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.

ISAs can also help savers and investors be a bit more disciplined when it comes to putting money away for the future. According to Shepherds Friendly, those who don’t have an ISA are twice as likely to dip into their savings compared to those that do have one.

Finally, there are amazing investment opportunities available. With an investment ISA, such as the Stocks and Shares ISA, or the Lifetime ISA, investors have the opportunity to build wealth at a fast pace.

Opportunities to build wealth

For example, through a Stocks and Shares ISA, there’s an option to invest in a global tracker fund, such as the Legal & General Global 100 Index.

This product tracks an index consisting of the 100 largest multinational companies.

Over the last five years it has returned about 102%, which translates to an annualised return of more than 15% a year. Past performance isn’t an indicator of future returns though.

Alternatively, there’s the option to invest in a selection of individual companies. Funds could be put into Apple (NASDAQ: AAPL) shares, for instance.

Over the last five years, these have risen about 230% (an annualised return of roughly 27%), turning a $5,000 investment into more than $16,000.

Now I’m not expecting Apple shares to deliver the same kind of return over the next five years. However, I still believe the company has a lot of long-term investment potential.

Across the world, there are around 1.5bn iPhone users today. So just wait until the company starts releasing artificial intelligence (AI)-powered iPhones. This could lead to a huge product refresh cycle and send Apple’s sales (and share price) soaring.

Another reason I continue to believe in Apple is that the company’s very active in the payments and digital healthcare markets. Looking ahead, these markets have plenty of room for growth.

It’s worth pointing out that investing in individual companies is riskier than investing in an investment fund, as every company has its own unique risks.

For example, looking at Apple, rising competition from other smartphone manufacturers in China could hurt its sales.

When done properly though, investing in individual companies can be very rewarding financially. And when done within an ISA – where gains are tax-free – the rewards can be even more compelling.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Apple. The Motley Fool UK has recommended Apple. 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.

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