We have less than a month left to make the most of our 2024-25 Stocks and Shares ISA! 5 April marks the final day to use up our £20,000 contribution limit. And even for the majority who don’t have as much as that to invest, every £1 we don’t put in is a £1 missed tax-free opportunity.
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.
Here’s a few possible approaches:
Option 1: Cash ISA
It can be tempting to go for a Cash ISA, with some rates still close to 5%. It’s a choice made by many who don’t want, or just don’t need, to take any stock market risk at all. And I reckon it could make sense as a shorter-term holding while rates are high, with a transfer of the cash to a Stocks and Shares ISA when the risk-to-reward balance shifts.
But as a long-term investment, I feel it’s not ideal. I’d be surprised if Cash ISA rates can stay above 2% for long when Bank of England interest rates fall.
What might £20,000 per year, spread monthly, at 2% annually achieve in 10 years? My calculations put the result at £221,350.
That’s a modest return on savings, but…
Option 2: biggest dividend
What about a Stocks and Shares ISA and putting all the money every year into the FTSE 100 stock with the biggest dividend yield? In reality I see it as madness to put all the eggs in one basket like that, and I won’t consider it for a moment myself.
But I just want to see what consistently hitting the highest in the Footsie might do. And right now, that’s from Phoenix Group Holdings (LSE: PHNX) with a forecast 10.3% dividend yield.
We can see straight away from that chart that the Phoenix share price has had a poor five years. And that’ll take a chunk off any investment returns. As well as owning a single stock being horribly risky, the insurance and investment business is possibly one of the most volatile on the stock market.
And the Phoenix price might have performed poorly because investors don’t expect the dividend to be maintained. Saying that, I think Phoenix Group is worth considering as part of a diversified ISA. Even if the dividend can’t keep up at this yield, I’m convinced it could still provide decent long-term income.
But if a consistent 10.3% can be attained, the same annual £20,000 invested every year for 10 years could grow to £341,140.
But considering how risky it might be…
Option 3: FTSE 100 average
Over the past 20 years, total FTSE 100 returns have averaged 6.9% per year.
If that keeps up, it could be enough to turn a £20,000 per year investment into £285,200 in 10 years. Over 20 years? £841,000.
That’s below the return from the top dividend yield, but it beats the pants off a Cash ISA. And spreading Stocks and Shares ISA investments across a wide range of FTSE 100 stocks should be a lot safer.
With some careful stock selection, I think starting with the FTSE 100 average and then aming to beat it with some carefully selected dividend stocks is a strategy worth considering.
