Tax is one of the certainties in life we can rely on, unfortunately. And at times like this, when government spending is going through the roof, we can also rely on the certainty that tax rises are on the way.
Indeed, the government has been pumping billions into fighting the economic and healthcare effects of the coronavirus pandemic. There’s speculation about where tax hikes will be applied, but not many voices are arguing that tax levels will remain where they are in Chancellor Rishi Sunak’s November budget.
Beat tax with UK shares in an ISA
However, right now we have an amazing facility available to us that will shelter our investments from tax. It’s the Stocks and Shares ISA. And we can currently shelter as much as £20,000 each year inside an ISA wrapper. My guess is Sunak will leave ISAs alone because of their high-profile nature – he wouldn’t want to attract the bad press!
And putting regular money into a Stocks and Shares ISA is a great way to build the wealth you need to eventually draw a passive income. So even if pensions become less attractive because of tax changes, you can use your ISA savings to supplement your income in retirement.
Of course, it’s fine to have even greater ambition for your ISA. Lord John Lee was the first of many British investors to make at least a million by investing within an ISA wrapper. If you invest regularly through your working life and compound your gains, a million is probably well within your grasp.
And £1m would be capable of generating a decent passive income for you in retirement. For example, the current dividend yield of the FTSE 100 index is above 3% according to estimates. So you could invest the money in a FTSE 100 tracker fund in retirement to generate an annual income of around £30,000. And that would be a handy addition to the government State Pension provision.
The joy of investing!
Happily, shares and share-backed investments, such as funds, are a great way to build up wealth in your ISA in the meantime. Over the long haul, shares in aggregate have outperformed all other major asset classes. And there’s every reason to expect them to continue to do so.
But instead of drawing passive income from your ISA in the building years, it’s best to plough all your returns back into your investments. If you do that, you’ll be compounding your investments. And compounding is key to building wealth. If you are investing in managed or tracker funds, you can often select the accumulation version, which automatically rolls dividends back in.
If you are investing in the shares of individual companies, you often need to accumulate your dividends within the ISA and reinvest them manually from time to time.But making your own investment decisions is part of the fun! Why not show Rishi Sunak who’s the boss and start investing in an ISA today? Good luck on your investing journey.
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.