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£100 a month to invest? I’d go for a Stocks and Shares ISA starting right now

When it comes to saving and investing for retirement, I think a Stocks and Shares ISA is an attractive option.

The rules allow you to save and invest as much as £20,000 in the current tax year. And that sum is known as your ISA allowance, which re-sets each year. Although you don’t have to put as much as that in annually if you can’t afford to. And putting £100 a month into a Stocks and Shares ISA would get your retirement pot off to a good start.

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A Stocks and Shares ISA reduces tax

An ISA is sometimes referred to as a ‘wrapper’. And ISA accounts stop us from paying tax on the money held inside them. When you hold your investments  in an ISA wrapper, you won’t have to pay any tax on the dividends you’ll receive or because of gains in share prices.

And you won’t have to pay income tax when you finally take money out of an ISA, perhaps when you retire. However, unlike Self-Invested Personal Pensions (SIPPs) and other pension wrappers, you don’t get tax relief on the money you pay into an ISA. But I like ISAs because of their flexibility.

Indeed, with SIPPs and other pension wrappers, you must currently wait until you are 55 until you can take money out. But with ISAs, you can take money out at any time with no penalties. And that ability could come in handy if your investments perform well and you want to retire early, for example.

So I’d consider using my annual ISA allowance when investing as part of my retirement planning. And there’s nothing to stop you also investing in a pension scheme or a SIPP if you want to invest more. Indeed, if you can get access to a workplace pension scheme, it could be worth considering because your employer will usually make extra payments into the fund for you on top of what you pay in yourself.

You can invest flexibly

You can choose between a range of investments within your ISA wrapper, such as investment trusts, managed funds, tracker funds and the shares of individual companies. And many ISA providers will offer low fees for regular dealing to accommodate your monthly payments into the ISA.

When you’re investing for the long term, it’s important to compound your returns. So I’d choose funds that automatically reinvest dividends for me. They are usually known as the ‘accumulation’ version of the fund. I’d also aim to reinvest the dividends received from my shareholdings in individual companies. Sometimes, ISA providers will offer an automatic dividend reinvestment service.

One of the keys to building wealth by investing in shares and share-backed funds is to do it for a long time. So I’d start right now if you haven’t already because the process of compounding delivers exponential gains. If you compound for a long time, there’s a chance those gains you receive in the later years of a programme of investing will be large enough to fund a comfortable retirement for you.

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Kevin Godbold has no position in any 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.