You have probably already heard that a stocks and shares ISA provides a tax-efficient way to invest your money. But have you ever wondered what the average return on a stocks and shares ISA is? How have investments held in a stocks and shares ISA performed historically? Let’s take a look.
What is a stocks and shares ISA?
Before we get into average returns, let’s clarify what a stocks and shares ISA is.
Basically, it’s a tax wrapper that can be put around a wide range of different investment products. These products include individual stocks and shares, unit trusts, investment trusts, corporate and government bonds, among others.
Any investment growth or income earned in a stocks and shares ISA is tax free. It’s important to note, however, that tax rules can change and tax treatment will depend on your individual circumstances.
You can save up to £20,000 each tax year in an ISA. This is known as the ISA allowance. The allowance can be shared around different types of ISAs, but not two of the same type.
What is the average return on a stocks and shares ISA?
The performance of any investment will depend on your investment strategy and the exact investments held.
Generally speaking, however, stocks and shares ISA have historically performed relatively well. For example, according to Finder.com, the average annual rate of return for stocks and shares ISAs from April 1999 to April 2020 was 5.14%.
Although the 2019/2020 tax year was one to forget for stocks and shares ISAs, with investors incurring losses of 13.3%, things turned around in 2020/2021 (as they quite often do when it comes to the stock market).
Stats from Moneyfacts.co.uk show that the average stocks and shares ISA returned 13.55% between March 2020 and March 2021.
This represents a significant improvement not only over the previous year’s losses but also over the average returns of the 2017/2018 and 2018/2019 tax years (4.80% and 4.04% respectively).
Is it worth getting one?
Money put into a stocks and shares ISA is invested. As with all investing, there is the risk of getting back less than you put in.
However, stocks and shares ISAs offer the possibility of higher returns on your money. This is especially true if you take a long-term approach. Stock markets may go up and down in the short term, but over the long term, they have an upward bias. If you are patient, you will almost certainly see a positive return.
Although a savings account or even a cash ISA may appear to be a safer option, rising living costs may erode the value of your savings pot if the rate of interest you are earning exceeds the rate of inflation.
That being said, if you know you will need your cash in the short term, say the next two to three years, then a cash ISA might be the better option.
Which one should I choose for the biggest returns?
When choosing a stocks and shares ISA, consider factors such as:
- Selection of investments available
- Availability of research tools
- Customer service
Keep in mind that the best stocks and shares ISA is one that you can afford and that comes with features that align with your goals, preferences and investing strategy. To help you make a good choice, we have reviewed some of the UK’s top providers of stocks and shares ISAs.
Finally, remember that past returns are not a guarantee of future results. And given the risk involved with investing in general, make sure you do your research before you part with your cash and seek independent financial advice if you need it.
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