Investing in the stock market via a Stocks and Shares ISA right now might seem like a risky prospect. After all, earlier this year, the market suffered one of its most aggressive sell-offs in history.
However, the long-term track record of the market shows it has always fully recovered from its downturns. As such, buying high-quality stocks while they’re priced at low levels today could be a sound strategy.
This strategy, when combined with the tax benefits of a Stocks and Shares ISA, could help you make a million in the market over the long run.
Stocks and Shares ISA
Using a Stocks and Shares ISA to invest has one key advantage. Any income or capital gains on investments held within an ISA are tax-free. This can have a significant impact on your wealth over the long term.
Indeed, the current tax-free dividend allowance for investments held outside an ISA is just £2,000. Basic rate taxpayers have to pay 7.5% tax on any dividend income above this level. Higher-rate payers have to pay more than 32.5%. That’s without taking into account capital gains tax.
It’s relatively straightforward to set up a Stocks and Shares ISA today. Most online stock brokers offer this option. They’re very similar to regular dealing accounts, and most brokers also provide a regular investment option, which can be a cheap and easy way to invest regularly in the stock market.
Setting up a regular investment plan in a stock index, such as the FTSE 100 or FTSE 250, is a great way to build wealth over the long term with a Stocks and Shares ISA.
Picking individual stocks can be a time-consuming and challenging process. Even the professionals get it wrong regularly. Buying the market as a whole eliminates the chances you’ll make a severe investing mistake. It may also dramatically improve your returns over the long run.
For example, since inception to the beginning of 2020, the FTSE 250 produced an annual return for investors in the region of 12%. While the coronavirus crisis has had a big impact on the index, it’s always fully recovered from setbacks in the past. It’s highly likely we will see the same recovery this time around.
A monthly investment via a Stocks and Shares ISA into the FTSE 250 could help you make a million in the market. A monthly investment of £300 for 30 years could grow to be worth £1m at an average annual rate of return of 12%.
If you can afford monthly deposits of £600, it may be possible to hit this target in just 24 years.
If held in a Stocks and Shares ISA, no further tax would be due on this investment when you come to sell it. As the basic capital gains tax rate is at least 10%, this could help you save as much as £100,000. Higher-rate payers would be able to save nearly £200,000 in capital gains tax alone using a Stocks and Shares ISA to invest.
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.