Want a relatively fuss-free way of dramatically increasing your wealth with minimal effort? No problem. In contrast to what some in the financial world will tell you, making money from investing can be devilishly simple. You can even earn while you sleep.
The first step isn’t exactly revelatory.
At the Fool, we’re continually banging on about the benefits of holding all your investments in a tax-efficient account such as a stocks and shares ISA. Not only does this protect any profits you make from income and capital gains tax, you always have access to that capital should you need it. Right now, you can invest up to £20,000 in a single year. Taking as much advantage of this allowance now can pay off over the long term.
For those that already have an ISA or are confident they won’t require access to their capital for many years, there is another option. Enter the SIPP — or Self-Invested Personal Pension.
SIPPs are an ideal, low-cost solution for those wanting to invest for the long term. In addition to being exempt from capital gains and income tax, you get tax relief on any contributions you make at your marginal rate. So, someone making an annual contribution of, say, £800 will receive an extra £200, based on a 20% marginal rate of tax. Higher rate taxpayers get an even better deal. To end up with £1000 in their pension pot, they need only contribute £600.
The benefits don’t stop there. Having a SIPP allows you complete control of your money and the opportunity to invest in a far greater range of assets than your typical mainstream pension plans. As well as being able to transfer in an existing pension, a SIPP also permits new contributions of up to £40,000 a year.
Receive, reinvest, repeat
Having set up and begun contributing to a SIPP or an ISA, you can begin generating a second stream of cash by investing in a decent-sized and sufficiently diversified basket of income-generating shares.
The beauty of adopting a dividend-focused strategy to investing is that you get paid while you’re busy getting on with life. As a part-owner of a business, you receive your share of profits that it makes regardless of whether you’re playing your favourite sport, having a coffee with friends or tucked up, counting sheep under a duvet. It’s the very definition of passive income.
As a dividend investor, there’s also no shortage of resilient, cash-generative businesses out there to buy. Oil giant Royal Dutch Shell hasn’t cut its payouts since the Second World War. Right now, its shares yield just shy of 6% — well over four times greater than the interest rate offered on the best cash savings account. Holders of stocks in power provider National Grid will get 6.3% based on its current share price; owners of Lloyds Bank will receive a forecast 6.8% this year.
Regardless of which investments you pick, the only thing you need to do in order to benefit from the beauty of compounding is reinvest what you receive back into the market. Given that you can only access your benefits (and withdraw 25% of your fund tax-free) from the age of 55, this is arguably much easier to do with a SIPP. Investing with an ISA will require a little more willpower.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.