Coming up with a robust investing strategy can take considerable time and effort. So why let HMRC take a slice of your hard-earned returns? The Stocks and Shares ISA is a brilliant product that stops such a cash grab.
With an ISA, investors don’t pay a penny in capital gains tax (CGT) or dividend tax. This in turn gives them more money to invest, amplifying the compounding effect, which — over two to three decades — can turbocharge an individual’s pension pot and help them retire in comfort.
Want to see the boost this can give your future wealth? Let’s break it down.
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.
Tax erosion
With stock market investing, individuals can target far higher gains than cash savings over the long term, even if returns can be volatile over shorter periods.
The average annual return for share investing is roughly 9% over an extended time horizon. That’s made up of roughly 5.5% in capital gains and 3.5% in dividends. Based on this, someone investing £500 a month could expect to make £915,372 after 30 years.
If generated in a tax-free ISA, a UK investor would get to enjoy all of that massive sum. But what about someone who doesn’t get those tax benefits?
Let’s say they’re a higher rate taxpayer earning £50,271 or more. They’d pay CGT at 24% and dividend tax at 33.75%, giving them £595,766. They’d be almost £320k worse off than if they’d used an ISA.
What about retirement income?
I’m sure you’ll agree those CGT and dividend tax savings are considerable. However, this isn’t the only considerable tax benefit of the Stocks and Shares ISA. It has another trick up its sleeve.
Unlike other investment products (and even the Self-Invested Personal Pension (SIPP)), ISA users are also safeguarded from income tax on withdrawals. How could this affect their income in retirement?
Let’s go back to our non-ISA investor and their £595,766 return. Assuming they had no other income, they’d have an annual passive income of £21,579 to live off. That’s assuming they drew down 4% of their portfolio each year.
The corresponding figure for a Stocks and Shares ISA investor would again be far higher, at £36,615.
Wealth building with minimal effort
As I say, creating a strong shares portfolio for retirement income can take time and effort. But it doesn’t have to. Exchange-traded funds (ETFs) are soaring in popularity as an effective way to build stock market wealth without the hassle.
Take the Vanguard FTSE All-World ETF (LSE:VWRP). It provides wide exposure to companies across sectors and regions, insulating investors from individual shocks and delivering a smoother return over time.
In total, it holds shares in roughly 3,800 global companies. And this includes a high weighting of technology stocks, which I really like. While this can add to short-term volatility, shares like Nvidia also provide the fund with enormous growth potential.
Over a five-year horizon, this Vanguard ETF’s delivered an average annual return of 11.2%. That’s even higher than the broader 9% average that long-term share investors enjoy. For ISA investors looking to build a large retirement income with little effort, it’s a fund that deserves serious consideration.
