Investing in the FTSE 100 could prove to be a worthwhile move – especially if it’s done through a Stocks and Shares ISA. Not only does it offer significant tax advantages versus a bog-standard sharedealing account, it’s also relatively cheap to open and administer compared to other financial product, such as a SIPP.
In addition, a Stocks and Shares ISA is simple to operate and could make budgeting in retirement easier due to withdrawals not subject to tax. It also offers a significant amount of flexibility, which could make it more appealing for a variety of investors who wish to be able to access their cash whenever they choose.
With the annual dividend allowance falling to £2,000 in recent years, many investors may find themselves paying tax on their income over the coming years. For example, assuming a portfolio has a yield of 4%, an investor would require a portfolio value of just £50,000 to use up their annual dividend allowance.
However, if you invest through a Stocks and Shares ISA there’s no dividend tax. Nor is there capital gains tax or income tax. This could lead to significantly higher returns – especially in the long run. It could make a real difference to your retirement age, as well as the financial returns you are able to generate in retirement.
Simplicity and costs
While a Stocks and Shares ISA offers significant tax advantages versus a bog-standard sharedealing account, it’s no more difficult to open or manage. In fact, many sharedealing providers’ Stocks and Shares ISAs operate in the same manner, in terms of their menus and layout, as a sharedealing account. This means that they’re highly accessible to experienced and novice investors alike.
Furthermore, Stocks and Shares ISAs are cheap to administer. The fee often amounts to less than the cost of a trade over the course of a year, which could make them highly appealing even to investors who are unsure whether they will ever end up paying tax on their investments.
A Stocks and Shares ISA provides greater flexibility than a SIPP or pension. It allows an investor to make withdrawals whenever they choose, which could mean it’s more suitable for younger investors who may require access to their capital for purchases such as a first home.
Additionally, the ability to make withdrawals tax-free at any point from a Stocks and Shares ISA means that you can plan more easily for retirement. In other words, it’s possible to determine an annual income that’s required, and then simply withdraw it from a Stocks and Shares ISA. This is in contrast to a pension or a SIPP, where you must be aged 55 or above and consider the tax implications of any withdrawals being made.
A Stocks and Shares ISA offers significant tax advantages, flexibility and simplicity compared to other types of sharedealing and pension accounts. As such, now could be the right time to open one in order to invest in FTSE 100 companies.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.