With the State Pension age expected to increase to 68 over the next couple of decades, many people in the UK will face the prospect of working for longer than ever. Indeed, it would not be a major surprise for the State Pension age to rise to 70 or beyond in the long run, with life expectancy increasing and the cost of funding the payout likely to come into sharper focus.
As such, opening a Stocks and Shares ISA and buying a range of FTSE 100 and FTSE 250 stocks could be a shrewd move. Not only does a Stocks and Shares ISA offer favourable tax advantages that could help you to produce a larger nest egg in retirement, it is a cost-effective and simple product that could make it accessible to anyone.
Any capital invested through a Stocks and Shares ISA is not subject to tax. This means that an investor can make vast amounts of capital gains, as well as sky-high dividends, tax-free.
This may not seem to be such an advantage in the short run. After all, every individual in the UK has an annual capital gains tax allowance of £12,000. But in the long run, avoiding capital gains tax and dividend tax could make a surprisingly large impact on your retirement prospects.
Of course, contributions to a Stocks and Shares ISA are subject to income tax. This may make a pension appear to be more appealing. However, with withdrawals from a Stocks and Shares ISA not being subject to tax, unlike pension withdrawals, the apparent relative tax advantages of a pension may be diluted to some degree over the long run.
With a Stocks and Shares ISA being relatively cheap and simple to open, it is a highly-accessible product for a wide range of people. In fact, it operates just like a standard online share-dealing account in terms of its functionality and, in some cases, costs. Therefore, it is a simple means of accessing the growth prospects which are currently on offer across the FTSE 100 and FTSE 250.
Furthermore, a Stocks and Shares ISA a simple product to understand. Since no tax is payable on withdrawals, it may make it easier for retirees to budget how much income they will require each year. And, with withdrawals being allowed anytime, it may allow you to retire at a relatively young age.
Since the FTSE 100 and FTSE 250 appear to offer good value for money at the present time, now could be an opportune moment to start investing through a Stocks and Shares ISA. With the State Pension becoming more akin to a top-up income in older age, rather than an income that can realistically cover all of a retiree’s expenses, having a nest egg that produces a passive income in retirement may be a necessity. Opening a Stocks and Shares ISA could be the first step in achieving that goal.
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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.