Every adult in the UK can put up to £20,000 in a Stocks and Shares ISA each tax year. However, only 2.8m adults took advantage of this product in the 2017-18 tax year.
With that in mind, here are the five reasons why I would open a Stocks and Shares ISA in 2020.
Saving for the future
It’s never too early (or too late) to start saving for the future. Most providers will allow you to set up a Stocks and Shares ISA with a relatively small lump sum. Monthly investment plans are also available from around £50 per month.
Even if you can only afford to save a couple of hundred pounds a year, it pays to make the most of your annual Stocks and Shares ISA allowance because you just don’t know what the future holds. It is best to put money away whenever you can.
Why is this? Well, Stocks and Shares ISAs also have significant tax benefits. You don’t have to pay any capital gains or income tax on investments held within an ISA wrapper.
Outside of an ISA, you receive a £2,000 dividend income allowance. A tax rate of 7.5% (for basic rate taxpayers) applies to any dividend income in excess of this level.
Basic rate taxpayers also pay 20% tax on capital gains above £12,000 (for the 2019-20 tax year).
A Stocks and Shares ISA means you get to keep more of hard-earned money.
You are allowed to hold any investment in a Stocks and Shares ISA as long as it is traded on a “recognised” stock exchange. That means most developed markets and a handful of emerging markets.
This means that investors are not limited to where they invest and can own stocks around the world. For example, if you are worried about the effects Brexit might have on the UK economy, you can balance your portfolio with overseas stocks.
Investing overseas will also give you exposure to other sectors that are not necessarily broadly represented in the UK, such as technology. And you do not have to pay tax on any investment profits.
When it’s gone it’s gone
Another good reason to open a Stocks and Shares ISA in 2020 is the fact that the ISA allowance is a ‘use it or lose it’ allowance.
Therefore, it makes sense to use as much of your allowance as possible every year.
And you can withdraw your money at any time as well. Nothing is stopping you depositing money in a Stocks and Shares ISA before the allowance turns over on April 5, and then taking it out at a later date.
The fifth and final reason why I would open a Stocks and Shares ISA in 2020 is the ability to start compounding as soon as possible.
Compound interest is the single greatest tool investors have to build wealth over the long term. The sooner you start compounding your money, the better.
For example, since its inception, the FTSE 250 has returned 10% per annum. At this rate of return, £1,000 invested for 10 years would grow to be worth £2.7k. Over three-and-a-half decades, the total would be £33k.
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Rupert Hargreaves owns no share 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.