The most that can be invested in a Stocks and Shares ISA each year is £20,000. The advantage of using this particular investment product is that any income and capital gains will not be taxed. Potentially, this makes it a great way of building long-term wealth.
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.
Good and bad
I deliberately used the word ‘potentially’ because there are never any guarantees when it comes to investing.
For example, on 1 May 2020, had the full ISA allowance been divided equally among the five FTSE 100 stocks in the table below, it would now be worth only £12,400. This excludes the impact of any dividends received.
| Stock | Change in share price (%) |
|---|---|
| Persimmon | -44 |
| Croda International | -41 |
| Vodafone | -39 |
| Smith & Nephew | -34 |
| Spirax Group | -34 |
| Average | -38 |
In contrast, had these five Footsie shares been included in an ISA, the initial lump sum would have ballooned to £92,600.
| Stock | Change in share price (%) |
|---|---|
| Rolls-Royce Holdings | +508 |
| 3i Group | +401 |
| Airtel Africa | +329 |
| Marks & Spencer | +293 |
| Centrica | +285 |
| Average | +363 |
This huge variance reflects the difference between choosing the five best and five worst performers (since May 2020) on the index.
Actual figures
In reality, investors are unlikely to achieve returns like these. It’s a mathematical certainty that most will be closer to the average.
And according to Moneyfarm, the average annual return on a Stocks and Shares ISA is 9.64%. If realised, this means a £20,000 investment would grow to £31,687 after five years.
But over the same period, the FTSE 100’s done better than this. It’s increased by an average of 12.6% per annum (with dividends reinvested). Over five years, with this growth rate, a £20,000 ISA would be worth £36,201.
However, although diversification is important, buying all 100 stocks on the index isn’t really practical. Any gains made from having £200 invested in numerous individual positions would be largely wiped out by the fees charged when buying and selling. In my opinion, anyone wanting to exactly match the performance of the Footsie, should buy a tracker fund instead.
A possible contender
Personally, I’m more comfortable investing in individual UK equities. And those looking for a long-term growth stock to put in their ISAs could consider Babcock International Group (LSE:BAB). Its share price has performed strongly this year. Since 1 January, it’s risen 63%.
This has been helped by a commitment from the UK government to raise defence spending to 2.5% of gross domestic product, from April 2027.
In 2024, the group earned 70.2% of its revenue from domestic customers, so it’s likely to benefit significantly from the additional money. It’s very much a case of ‘buy local’ when it comes to government spending in the sector. Buying more military hardware is often viewed as an effective means of promoting economic growth and creating jobs.
And whether we like it or not, the industry is a large and growing one. The global market was worth $2.7trn in 2024, which marked the tenth year of consecutive increases.
However, the group faces some challenges. Most ethical investors will probably not want to invest. Also, I’m concerned that it incurred approximately £100m of cost over-runs on its Type 31 contract with the Royal Navy.
Despite these risks, I think it’s a stock that those looking to beat the average return on a Stocks and Shares ISA could consider. And even if it doesn’t beat the average, I reckon the return’s likely to be higher than that earned from doing nothing with any spare cash. Moneyfarm claims that the annual gain on a typical cash ISA is only 1.21%.
