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Is a Stocks and Shares ISA worth it?

Is a Stocks and Shares ISA worth it?
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What is the point of a Stocks and Shares ISA? They allow us to invest up to £20,000 per year in shares, without paying any tax on the profits. That’s all very well for those who can afford to invest sums like that, but what help is it to folks like me who don’t have that much to put aside?

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After all, we have an annual capital gains allowance each year. So at the moment, we can cash in share profits to the tune of £12,300 without paying any tax anyway. So what’s the point? Well, I don’t want to cash in any shares in any one year, I want to hold for the long-term. And I can’t carry that allowance over. But with a Stocks and Shares ISA, I effectively can. Let me work out an illustration.

Suppose I can invest, say, £500 per month. That’s £6,000 per year, and well short of my ISA allowance. And I don’t expect to gain more than the £12,300 of my capital gains allowance with a sum like that. But how does it work out over the long term?

Stocks and Shares ISA returns

According to a study conducted annually by Barclays, the UK stock market has returned an average of 4.9% per year in total (with share price rises plus dividends). Oh, that’s 4.9% ahead of inflation. I’ll call it 6% including inflation, which seems conservative. So how much would my £500 per month, invested in a Stocks and Shares ISA at a compounded 6% per year with all income reinvested, amount to in, say, 40 years?

Now, I won’t be investing for another 40 years myself. Not unless I blow past my family’s longevity records. But 40 years is a realistic long-term investing horizon for someone in their twenties looking for a comfortable retirement by their sixties.

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After 40 years, total contributions would come to £240,000. It might seem hard to believe, but at 6% per year that would grow to more than £950,000. With a bit of extra luck, or a little more invested, our Stocks and Shares ISA could be holding a cool million.

A retired millionaire

In that situation I wouldn’t want to cash in the whole million all in one go. But I’d want to take out enough to help towards a comfortable retirement. And I wouldn’t have to pay any tax on it.

To ponder one further question, why a Stocks and Share ISA? Why not a Cash ISA? Well, there is a risk that the stock market will not live up to its past performance. After all, there is that thing about past performance not being an indicator of future performance. And I reckon we’re likely to see more stock market crashes, just like in 2020. Cash is surely going to be safer, isn’t it?

Well, Cash ISA interest rates are typically only about 0.5% right now. There are some that offer around 1% for a fixed-term deal, but that’s not a whole lot better. Even 1% per year would see the £240,000 of investment contributions turn into only around £295,000. I can’t see that even matching inflation.

My choice, for 2021 and beyond, is a Stocks and Share ISA, and I’ll be contributing every month.

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