A Stocks and Shares ISA could improve your chances of making a million. It offers a low-cost means of avoiding taxes such as capital gains tax and dividend tax. Over the long run, the tax savings it offers could really add up.
Furthermore, it is a simple product that is easy to understand. This makes it appealing to experienced and novice investors alike, and could mean that you can spend more time focusing on your investments.
While any capital gains and dividends received on shares held in a bog-standard share-dealing account are subject to tax, no taxes are levied on holdings within a Stocks and Shares ISA. While in the short run, the annual capital gains allowance of £12,000 and the annual dividend allowance of £2,000 may be sufficient for many investors, in the long run they may lead to a significant amount of tax being paid.
For example, investing £100 per month in the FTSE 100 over a 40-year working life could lead to a nest egg of around £240,000, assuming a 7% annualised return. Given that the index currently yields 4.5%, the portfolio would eventually generate annual dividends of around £10,800. This would be well in excess of the annual dividend allowance and would lead to tax being paid within a bog-standard share-dealing account. As such, it may not take superhuman returns or investments to enable an investor to benefit from the tax efficiency of a Stocks and Shares ISA.
While there is often a management fee charged by a Stocks and Shares ISA provider, in many cases this is minimal. It can be less than the cost of one buy or sell transaction in some cases, which helps to make the product affordable for a wide range of investors.
Although low costs may not make a large impact on returns in the short run, over the long term they can have a significant influence on your financial prospects. Furthermore, since Stocks and Shares ISAs often charge a flat fee rather than a percentage fee, the cost of the product relative to portfolio size generally falls over the long run. Other financial products that charge a percentage fee may become more expensive as the size of a portfolio increases.
The fact that no tax is levied on returns within a Stocks and Shares ISA, as well as withdrawals from the product, means that budgeting is made simple in retirement. This contrasts with a SIPP or a pension, where considering the tax implications of withdrawals can take up a surprisingly large amount of time.
This leaves an investor with the ability to focus on the performance of their investments, rather than worrying about its administration. This may increase the chance of finding the best investment opportunities, and in doing so improve your prospects of becoming a millionaire.
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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.