A Stocks and Shares ISA is a great way to save for the future. Even if you can’t afford a big lump sum every month, these tax-free wrappers could help you build a substantial financial nest egg.
Stocks and Shares ISA benefits
Anyone can open a Stocks and Shares ISA and start contributing. Most online stock brokers offer investment plans starting from as little as £50 a month. You can put up to £20,000 a year away too.
Any income or capital gains earned on the cash stashed inside one of these wrappers doesn’t attract tax liabilities. You don’t even need to declare the ISA on your tax return. That makes the product especially attractive for higher rate taxpayers.
The tax-efficient nature of a Stocks and Shares ISA means it’s also an excellent instrument for savers. As the £20,000 is a use-it-or-lose-it allowance, it makes sense to use as much as possible every year. There’s no penalty for withdrawing your money, so you can always take it out at a later date.
Even a relatively modest investment of £100 a month can add up to big bucks in a Stocks and Shares ISA.
Investing for the future
Choosing the investments for this ISA can be a challenging process. However, the best strategy could be to use low-cost index funds. Investors who are saving for the next three-to-four decades would benefit from investing in a low-cost FTSE 250 or FTSE 100 tracker fund.
Meanwhile, investors saving for the next one-to-two years might benefit from buying a low-cost equity income tracker fund.
Investors with a shorter time horizon than five years might be better off buying bond funds, or staying in cash. It’s impossible to tell where the market will go in this short time frame.
A contribution of £100 a month could yield substantial results over the long run. The FTSE 250 has produced an average annual return of 12% since its inception three-and-a-half-decades ago. Based on these figures, an investment of £100 a month in the index over this time frame would be worth £650,000 today.
There’s no guarantee the FTSE 250 will produce similar returns in the near term. Still, over the next few decades, it’s highly likely the index will match its long-run average.
Assuming the global economy is bigger in 10 years than it is today, the index constituents should also be more substantial. Efficiency improvements and dividend distributions will help improve profits and shareholder returns. That should translate into more significant profits for investors.
As such, if you have a spare £100 a month to invest, and an investment horizon of three-to-four decades, opening a Stocks and Shares ISA and setting up a monthly investment plan in the FTSE 250 may be the best way to grow your hard-earned money over the long run.
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Rupert Hargreaves 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.