We can invest up to £20,000 a year in a Stocks and Shares ISA and pay no tax no matter how much it grows.
And every year there’s a last-minute rush, as people try to use as much of the year’s limit as they can. Once the cash is transferred in, we don’t need to rush to buy shares with it. But that doesn’t stop us getting stressed about what kind of strategy to pursue and which shares to buy.
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And relax…
So why not start planning during the Christmas and New Year holiday season? For those wanting to start a new ISA in particular, it can be worth getting ready well in advance of the April starting gun.
I think it’s worth taking a moment to mention Cash ISAs here. Returns have been reasonable over the past few years of high interest rates. But they’re sure to drop when inflation gets back closer to the Bank of England’s 2% target. And the November budget slashed the Cash ISA limit starting 2027.
Over the long term, the UK stock market has beaten returns from Cash ISAs. But I rate a Cash ISA as ideal for keeping some short-term cash. And some people simply don’t want any stock market risk at all. Unlike shares, Cash ISA returns are at least guaranteed.
Stocks and Shares ISA
We face well over 1,000 companies on the UK stock market, plus a whole host of eligible overseas ones, so how can we hope to narrow them down?
There is, thankfully, an option that requires no research. Don’t have any particular shares in mind, but want to get in on some stock market action? Consider buying an index tracker fund, like the iShares Core FTSE 100 UCITS ETF (LSE: ISF).
It’s an exchange-traded fund, so we can buy shares in it just like any other UK stock. And it aims to match the capital and income returns of the whole FTSE 100. So far it’s been hitting that goal very closely, and the annual charges are some of the lowest in the business.
If it should match the past 20-year average FTSE 100 returns of 6.9% a year, what might that mean? A single full-year ISA allowance of £20,000 invested and left for 20 years could grow into £76,000, without adding a single extra penny.
Or consider a more modest £500 a month for a total of £6,000 a year. Keep doing that for 20 years and it could mount up to as much as £250,000. How much we can afford, and how often we can contribute, varies widely from person to person.
Next steps
We’ll still face general stock market risk. And I’d be wary of trusting all my money to the management of just one company. Other providers include Vanguard, with funds also tracking global stock markets like the S&P 500 in the US. Then there’s Invesco, HSBC Holdings…
Whichever we choose, I reckon an index tracker is a great way to start an ISA. And then we can take our time to think about expanding to investment trusts and individual stocks.
