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Put Your ISA Money In Shares, Not Cash!

We generally expect the Chancellor of the Exchequer to spend his wicked time working out fiendish ways of extracting the most he possibly can from us in tax.

But we really should thank Gordon Brown, who was Chancellor in 1999 when ISAs were introduced to replace and simplify the old PEP scheme, because they really are a very good thing — and we should make the best use of them that we can.

Tax-free profits

What an ISA boils down to is a way to invest up to £15,240 a year (in either a Cash ISA or a Shares ISA) and not pay tax on the proceeds. So, interest on cash held in an ISA is not taxable, and neither is any capital gain you make from share price rises. You can’t actually get back the basic-rate tax pre-paid on dividends from shares, but at least they won’t be liable to any further tax.

Over the long term, using up as much as your allowance every year as you can, investing in an ISA can save you a very substantial amount of tax. And I reckon such an opportunity is wasted with the pathetic interest rates available from cash ISAs these days.

Sure, it’s not current rates that really count, it’s long-term returns that matter — but it’s over the longer term that the more volatile nature of the stock market evens out and the extra short-term risk almost completely evaporates. But you won’t just take my word for it and you need to see some figures, right?

Show me the evidence!

Well, the annual Barclays Equity-Gilt Study compares the returns from shares, cash and gilts going back more than a century, looking at rolling periods of different lengths. And this year’s study shows that the stock market has beaten cash in nine out of ten 10-year periods under study. So even if you’re only thinking of investing for a single decade, you have a much better chance of winning with shares.

But you have a longer-term plan than that, surely? If we turn to 18-year periods, shares have beaten cash a stunning 99% of the time. And we only have to wind that up to 23-year periods to reach the point where cash has never beaten shares even once.

So where’s the recent banking crisis in all of that, or the dot-com boom and bust of 2000, or even the famous 1929 crash? They’re all just minor blips in the chart, and all are easily beaten by buying shares and holding on to them for the long term.

How much?

Still not convinced? OK, let me offer one more taste. Suppose you’d invested £100 in the stock market at the end of the war in 1945, that alone would now be worth a little over £9,000 after inflation. And had you reinvested all your dividends in buying more shares, your pot would have soared to a magnificent £180,000!

So use your ISA to invest in shares, and reinvest all your dividends — it really seems like the obvious choice to me.

Investing in shares using the tax protection of an ISA, and making the most of each year's allowance, is one of the best ways to secure your financial future.

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