For many, a Stocks and Shares ISA is the preferred investment product for building retirement savings. By sheltering investors from dividend tax and capital gains tax, they can significantly bolster chances of creating long-term wealth.
There are other tax-efficient vehicles people can choose from, namely the Lifetime ISA and the Self-Invested Personal Pension (SIPP). These products also provide Britons with handy government top-ups they can use to invest.
Yet the Stocks and Shares ISA has distinct advantages for those looking to take early retirement. Individuals need not worry about paying tax on withdrawals, or the age at which they’re eligible to draw money out. The £20,000 annual allowance is also higher than the £4,000 available on a Lifetime ISA.
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.
If someone aged 30 invested £500 in a Stocks and Shares ISA each month, here’s what they could have to retire on at 60.
Taking a diversified approach
Thanks to the mathematical phenomenon of compounding, the longer money has been locked in the stock market, the greater chance is to build exponential wealth.
Even after accounting for periods of market volatility, stock markets have proven a great way to build wealth over an extended time horizon. Starting at the age of 30 gives someone an excellent chance of building a large nest egg for retirement, though their ability to achieve this will of course depend on their investing strategy.
A diversified portfolio’s typically key to building long-term wealth, and I think having exposure to around 20 shares should be a bare minimum to consider. Investors can split their holdings down a variety of lines, including by territory, industry, sub-sector and market capitalisation.
A £66,385 passive income
But building a broad portfolio can take time, effort and a lot of transaction fees to build. Selecting individual shares to buy can often lead to market-beating returns, but it’s not for everyone.
Thankfully modern investors can quickly and cheaply acquire holdings in baskets of shares through the growing number of exchange-traded funds (ETFs). These can contain dozens, hundreds, or even thousands of equities to help investors spread risk and capture investment opportunities.
The iShares Edge MSCI World Quality Factor ETF (LSE:IWFQ), for instance, has holdings in 295 companies from across the globe. With a focus on businesses with records of “strong and stable earnings”, it’s delivered an average annual return of 9.9% over the past decade.
Can it continue this strong performance? I think so, even though its heavy bias towards the US (74.4% of the fund) leaves it vulnerable to falling demand for Stateside assets.
High exposure to sectors including information technology, financials, healthcare and consumer goods provides it with significant growth potential. A 30-year-old investing £500 a month could — based on the last 10 years — expect to have a portfolio worth £1,106,416 by age 60.
That’s not guaranteed, of course, but in theory they could then enjoy an annual income of £66,385 to retire on if they invested their wealth in 6%-yielding dividend shares. I believe funds like this are worth considering and an excellent way to balance risk and reward.
