Investing in the stock market through a Stocks and Shares ISA has become simpler and cheaper over recent years. Online share-dealing has helped to make Stocks and Shares ISAs more attractive to a wider range of people, yet they are still not as popular as they perhaps should be, given their long-term return potential and tax efficiency.
Certainly, the return potential of Premium Bonds and the National Lottery may be higher than the stock market. But, realistically, the chances of winning £1m+ on either of those products are slim. As such, now may be the right time to open an ISA and buy a range of FTSE 100 and FTSE 250 stocks for the long run.
The chances of winning the National Lottery jackpot are just one in 45m. This means that the vast majority of people who buy lottery tickets are likely to lose their stake. Likewise, Premium Bond winners are few and far between. This means that the average annual return on Premium Bonds is around 1.4%.
By contrast, it is realistic to assume that investors can generate a high-single-digit annualised return from the stock market. Evidence of this can be seen in the FTSE 100’s past performance. Since its inception in 1984, the index has recorded annualised total returns of around 9%. Although these returns have not been uniform, investing over a long period could mean that you are able to generate similar returns.
As with Premium Bond and National Lottery wins, investing through a Stocks and Shares ISA is tax-free. Unlike a bog-standard share-dealing account, there are no taxes charged on the investment gains and dividends made within an ISA. This could mean that your portfolio has a better chance of improving your financial future – especially with taxes on dividends, for example, having increased in recent years as a result of the dividend allowance being reduced to £2,000 per annum.
In addition, withdrawals from a Stocks and Shares ISA are tax-free. This could make them more attractive to some investors than a SIPP or workplace pension – especially since withdrawals can be made from ISAs at any time without penalty.
As mentioned, the growth in online share-dealing has made Stocks and Shares ISA more accessible. It is possible to open an ISA online in a matter of minutes, while the cost of administering it can be minimal. In addition, building a diverse range of shares is cheaper and simpler as a result of services such as regular investing. They can reduce dealing costs to as little as £1.50 per trade and help to improve your overall returns.
Therefore, while Premium Bonds and the National Lottery may provide the chance to win £1m+, the reality is that investing modest amounts in shares through an ISA could be a more profitable move in the long run.
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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.