Using ISAs avoids extra taxes on capital gains (from selling assets at a profit) and income (such as savings interest, share dividends, or bond coupons). They are a no-brainer for over-18s (over-16s for Junior ISAs).

Taxing times

Even ISAs cannot stop British high-earners from paying some of the world’s heftiest tax rates. This is because the UK tax system is horrendously complex.

Indeed, Tolley’s Tax Guide — the definitive manual for UK taxation — now stretches across 45 chapters and around 1,050 pages. After decades of fiddling by successive governments, today’s tax system resembles Frankenstein’s monster. It’s a horrible mish-mash of different tax rates, exemptions, allowances, and loopholes.

For example, income tax on earned income in England and Northern Ireland has three rates: basic (20%), higher (40%), and additional (45%). Another tax — employees’ Class 1 National Insurance contributions (NICs) — has a standard rate of 8% and an upper-earnings rate of 2%.

Thus, middle earners often face combined tax rates nearing 50%. Furthermore, the withdrawal of the annual personal tax allowance of £12,570 creates a crazy ‘cliff edge’ (no pun intended!) for those earning £100k+ a year.

Above this level, workers face a marginal tax rate of 62% a year, consisting of 40% income tax, 2% NICs, and an effective 20% tax charge from withdrawing the tax-free allowance. Above £125,140, this rate drops to 47%.

To me, this is bonkers, because earning more can actually leave workers worse off as childcare support is lost. Therefore, many senior workers (including NHS doctors) choose to work four days a week, leaving them better off than working a five-day week. This damaging and daft tax nightmare affects hundreds of thousands of British workers.

Dodging 62% tax

Many professionals I know detest this 62% marginal tax rate. However, some don’t pay it. They use two legal ways to keep their incomes below £100k: salary sacrifice (which HMRC is already reining in) and pension contributions.

A few put every penny above £100k into their pensions, dragging their taxable incomes back below six figures. This is no easy task, plus it’s also limited by maximum pension contributions of £60,000 per tax year.

One worker investing large sums into pensions asked me which globally diversified fund I prefer. My wife and I invest in the Vanguard FTSE All-World UCITS Accumulating ETF (LSE: VWRP). This exchange-traded fund (ETF) — also a London-listed share — is widely held by UK investors.

This fund passively owns almost 3,800 stocks worldwide, including the biggest global and tech businesses. Launched in July 2019, it has total assets of $36.3bn. Vanguard — my favourite low-cost investment manager — recently reduced the ongoing charge to 0.19% a year.

For my family portfolio, this ETF offers massive diversification with low fees. Up 18.2% over one year and 64.8% over five years, it’s now our biggest shareholding. Of course, when stock markets slump (as happened last month), down goes the VWRP share price. Also, if the US-Iran war drags on, then I expect this fund to suffer further falls.

That said, my aim is for this core ETF to become the financial foundation for our happy retirement!

The post Even saving or investing in an ISA can’t stop this 62% tax rate! appeared first on The Motley Fool UK.

Now, looking at performance figures, I can see his point. Relative to the broader market, it has been a very poor investment. So, is the fund still worth holding in 2026?

Negative returns

Zooming in on two-year performance, this fund really has been a stinker. According to Hargreaves Lansdown, over the last year (to 26 March), it has returned -8.6%.

The year before that, its return was about -2.7%. Put those yearly returns together, and we’re looking at a total return of about -11%.

It gets worse though. Fundsmith is quite an expensive fund – through Hargreaves Lansdown fees are 0.94% per year.

That wipes off another 2% or so. So, overall investors are down about 13%.

How have other assets performed?

Of course, a -13% return isn’t the end of the world. An investor can recover from that pretty easily.

However, compared to the returns generated by some other assets, it’s very disappointing. Over the same period:

• An All-World Index ETF is up about 23% (in GBP terms)
• A FTSE 100 ETF is about 35%
• Rolls-Royce shares are up about 170%
• Nvidia shares are up about 85% (in USD terms)

Ultimately, investors could have generated much higher returns with other funds and/or stocks.

Multiple problems

What’s gone wrong? A lot of things.

For a start, fund manager Terry Smith’s ‘quality’ style of investing hasn’t been in favour. Investors have been focused on value shares and cyclical shares instead.

Secondly, Smith has missed big themes. Examples include the AI buildout and the defence spending supercycle.

Third, Smith’s stock selection has let him down. A lot of the shares in the portfolio have underperformed spectacularly – a major problem when you only own around 30 stocks.

Better options in 2026?

So, is this product worth holding on to? Well, it could be if an investor is seeking a quality-focused fund (I still like quality as an investment style) and/or a fund that doesn’t behave like the broader market.

I’ll point out that the long-term track record is still very good. Between inception in 2010 and the end of February, it returned 13.5% per year.

However personally, I think there are better investments to consider in the market today. One fund I like more is the Vanguard FTSE All-World UCITS ETF (LSE: VWRP), which offers broad exposure to the global markets.

The advantage of this kind of index product is that it will automatically capture gains from companies that get dramatically bigger in size. For example, if Uber or Palantir were to become trillion-dollar companies, the ETF would capture their rises.

Another benefit is the low cost. Fees are just 0.19% meaning that it’s far more cost effective than Fundsmith.

On the downside, if major stock market indexes fall, this product is guaranteed to fall because it’s an index tracker (an actively-managed fund like Fundsmith could potentially generate a positive return).

Another disadvantage is that it’s heavily weighted to past winners. For example, Apple and Microsoft have huge weightings.

Overall though, I see it as a solid core holding and believe it’s worth considering.

The post Is Fundsmith Equity still worth holding in a Stocks and Shares ISA or SIPP in 2026? appeared first on The Motley Fool UK.

Yet it’s tough to predict exactly how much money we’ll need in savings or pensions to retire comfortably. Fortunately, analysts at Fidelity have crunched the numbers for us. Want to know if you’re on course?

The key numbers

There’s a wealth of research showing that a second income of £50,000 can help fund a comfortable retirement. Fidelity has run with this number and predicts someone age 65 will need a nest egg worth £1,000,0000 to earn income of this size.

The financial services provider then calculated how much people will need at different ages to be on course for this target, assuming 5% investment growth each year and annual contribution growth of 2%.

Its analysts found that:

• A 30-year old needs £34,826 in savings and to be contributing £544 a month.
• A 40-year old requires £149,159 in savings and to be contributing £664 per month.
• A 50-year-old needs £357,567 saved up and to make £809 a month in contributions.
• A 60-year-old requires £725,323 in savings and to be contributing £986 a month.

Are you on track?

The earlier one starts on their retirement savings journey, the better. Beginning sooner gives people more time to build up their pensions pot, naturally. Furthermore, the longer investments are left to grow, the greater the impact compounding has, where all previous returns generate earnings of their own.

So based on Fidelity’s findings, are you where you need to be for a healthy retirement income? If so, great! If not, you may have work to do, but there could still be plenty of time for you to catch up.

Thanks to the wealth-building power of the stock market, even a 50-year-old has time to build a sizeable retirement fund.

Building wealth at 50

Let’s say we have someone looking to retire 15 years from now at age 65. They have 175k in savings, which is less than half the £357,567 Fidelity suggests.

If they can make £809 monthly contributions that rise 2% a year, they’d still have a portfolio above £1m by the time they retire. That’s based on the long-term average annual return of 9% that stock markets have delivered long term.

Past performance isn’t always a reliable guide to future returns. However, holding a diversified range of shares can reduce volatility and risk, and maximise the wealth-building power of share investing.

Targeting retirement income

Want a quick and cheap way to achieve this? Consider investing in an exchange-traded fund (ETF) like the Vanguard FTSE All-World ETF (LSE:VWRP), which holds a wide variety of global shares.

In total, this product holds positions in 3,794 different companies. These include US tech stocks, UK miners, Japanese carmakers, and Canadian banks. This cross-industry and country approach provides a range of investment opportunities and protects investors from localised risks. And it’s paid off handsomely — over 10 years, this Vanguard product’s delivered an average annual return of 12.7%.

Like any stock-based ETF, returns could disappoint during periods of broader market weakness. But I’m confident that, over the longer term, it should continue helping people build a considerable income for retirement.

The post Want a £50k passive income? Here’s how much you may need at 50 appeared first on The Motley Fool UK.

With an ISA, investors don’t pay a penny in capital gains tax (CGT) or dividend tax. This in turn gives them more money to invest, amplifying the compounding effect, which — over two to three decades — can turbocharge an individual’s pension pot and help them retire in comfort.

Want to see the boost this can give your future wealth? Let’s break it down.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Tax erosion

With stock market investing, individuals can target far higher gains than cash savings over the long term, even if returns can be volatile over shorter periods.

The average annual return for share investing is roughly 9% over an extended time horizon. That’s made up of roughly 5.5% in capital gains and 3.5% in dividends. Based on this, someone investing £500 a month could expect to make £915,372 after 30 years.

If generated in a tax-free ISA, a UK investor would get to enjoy all of that massive sum. But what about someone who doesn’t get those tax benefits?

Let’s say they’re a higher rate taxpayer earning £50,271 or more. They’d pay CGT at 24% and dividend tax at 33.75%, giving them £595,766. They’d be almost £320k worse off than if they’d used an ISA.

What about retirement income?

I’m sure you’ll agree those CGT and dividend tax savings are considerable. However, this isn’t the only considerable tax benefit of the Stocks and Shares ISA. It has another trick up its sleeve.

Unlike other investment products (and even the Self-Invested Personal Pension (SIPP)), ISA users are also safeguarded from income tax on withdrawals. How could this affect their income in retirement?

Let’s go back to our non-ISA investor and their £595,766 return. Assuming they had no other income, they’d have an annual passive income of £21,579 to live off. That’s assuming they drew down 4% of their portfolio each year.

The corresponding figure for a Stocks and Shares ISA investor would again be far higher, at £36,615.

Wealth building with minimal effort

As I say, creating a strong shares portfolio for retirement income can take time and effort. But it doesn’t have to. Exchange-traded funds (ETFs) are soaring in popularity as an effective way to build stock market wealth without the hassle.

Take the Vanguard FTSE All-World ETF (LSE:VWRP). It provides wide exposure to companies across sectors and regions, insulating investors from individual shocks and delivering a smoother return over time.

In total, it holds shares in roughly 3,800 global companies. And this includes a high weighting of technology stocks, which I really like. While this can add to short-term volatility, shares like Nvidia also provide the fund with enormous growth potential.

Over a five-year horizon, this Vanguard ETF’s delivered an average annual return of 11.2%. That’s even higher than the broader 9% average that long-term share investors enjoy. For ISA investors looking to build a large retirement income with little effort, it’s a fund that deserves serious consideration.

The post Want to boost your retirement fund? Consider a Stocks and Shares ISA appeared first on The Motley Fool UK.

Recently however, I decided to offload the fund and redeploy the capital into other investments. Here’s why I made this move.

Terrible performance in 2025

I’ve been concerned about the performance of this fund for a while now. That’s because it hasn’t kept up with the market in recent years.

Last year’s performance was the final straw for me. In a year in which pretty much every major index went up significantly (the MSCI World index returned 12.8%), this fund only returned 0.8%.

What’s gone wrong? Well, one issue is that the fund hasn’t fully participated in the tech stock boom.

In his annual letter, fund manager Terry Smith highlighted the current market concentration in Magnificent Seven stocks as a risk. There’s a reason the market’s concentrated in these names however, and that’s because their earnings have soared in recent years.

2026 outlook

Now, I do like Smith’s ‘quality’ style of investing – it’s similar to my own. However, looking ahead, I’m unconvinced the fund has the potential to beat the market in 2026.

Here’s a look at the top 10 holdings in the fund at the start of the year versus the top 10 of the Vanguard FTSE All-World UCITS ETF (LSE: VWRP).

Looking at Fundsmith’s top holdings, they’re not bad companies. In fact, they’re all world-class companies. However, right now, many are just as expensive as the Mag 7 tech stocks in the Vanguard fund. Waters, for example, trades on a price-to-earnings (P/E) ratio of about 28.

I’d expect the stocks in the Vanguard fund to generate more growth in the near term however. This year, Nvidia’s revenues are forecast to rise 54% versus 6% growth expected for Waters.

High fees

A third reason I’m bailing on Fundsmith is the fee structure. Ultimately, it’s too high given the lack of performance. Currently, annual fees through Hargreaves Lansdown are 0.94%, compared to 0.19% for the Vanguard fund above.

I don’t think Smith and his team are doing enough to justify the high fee. For that fee, I’d want to see better stock-picking ideas.

Where have I put the money?

As for where I’ve redeployed the capital, I’ve put it into two different tracker funds. One is the Vanguard fund mentioned above.

With this fund, I get exposure to over 3,600 different stocks for a very low fee. And the beauty is, winners can run and run (like Nvidia has in recent years).

The other fund I’ve gone with is the Legal & General Global 100 Index Trust. This is a low-cost tracker that provides exposure to the 100 largest companies in the world.

It’s worth noting that these funds also have their risks. If the Technology sector has a meltdown, these products are likely to underperform.

I’m bullish on technology however, so I’m comfortable with the risks (and believe the funds are worth considering).

I’ll point out that I may come back to Fundsmith at some point in the future. As I said, I like Smith’s quality approach. I just feel that right now, there are better investments.

The post I just dumped Fundsmith Equity from my Stocks and Shares ISA and SIPP. Here’s why appeared first on The Motley Fool UK.

Here, I’m going to highlight three Vanguard ETFs that could be worth considering for 2026 (and beyond). I see these funds as a great way to build wealth with minimal effort.

An ideal core holding

For a core portfolio holding, it’s hard to beat Vanguard’s FTSE All-World UCITS ETF (LSE: VWRP), in my view. This is a broad global tracker fund that provides exposure to over 3,600 stocks across developed and emerging markets.

All the big stock market names (Apple, Nvidia, Tesla) are in it. And ongoing fees are only 0.19% per year.

In terms of risk, Vanguard puts it at six out of seven so it’s higher up on the risk spectrum (because it’s only invested in stocks). One thing that’s worth highlighting is the fact that US stocks make up about 65% of the fund (and the Magnificent 7 make up about 35% of the US market) so there’s certainly some geographic and tech sector risk here.

Overall though, I see this as a great product for straightforward exposure to the global markets.

A portfolio diversifier

If an investor is looking to diversify away from the US market, Vanguard’s FTSE Emerging Markets UCITS ETF (LSE: VFEG) could be worth a look. This offers exposure to emerging market countries such as China, Taiwan, India, and Brazil.

One thing that appeals to me about this product is that there are some really exciting Chinese companies in the portfolio. Baidu is a good example – it has AI models, AI chips, self-driving taxis and more.

Other names in the ETF include Taiwan Semiconductor, Alibaba, and BYD. So, there are some world-class companies in the mix.

Vanguard puts the risk level here at six again. For me, the big risk is geopolitical tension (eg between the US and China or China and Taiwan).

I see a lot of long-term potential, however. Fees are 0.17% per year.

It’s hard to ignore the US market

If bullish on the US market (“Never bet against America” is Warren Buffett’s advice), Vanguard’s S&P 500 UCITS ETF (LSE: VUAG) could be a good fund to consider. This aims to track the legendary S&P 500 index.

Top holdings are currently Nvidia, Apple, and Microsoft. Fees are just 0.07% per year.

Can the US market continue to perform after several years of strong gains? Plenty of experts believe so.

Analysts at Oppenheimer recently stuck a 8,100 target on the index for 2026. That’s almost 20% above the current level.

This fund is also rated six out of seven for risk. For me however, it’s riskier than the global fund as it’s only focused on the US market.

I think the risk may be worth taking on though. Over the long run, the S&P 500 has been a proven performer.

The post 3 top Vanguard ETFs to consider for an ISA or SIPP in 2026 appeared first on The Motley Fool UK.

But how much do you need in an ISA to generate a decent amount of income? I’m not talking about £100 or £200 here and there, but more like £5,000 a month. Let’s take a look.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A complex question

This is actually a really hard question to answer. Because there are so many variables to consider.

For example, are we talking about £5,000 per month today or £5,000 in 10 years’ time? Because these are two different things.

Assuming inflation runs at 3% per year for the next decade, £5,000 in 2035 would only have the purchasing power of about £3,700 today.

Then, we need to consider dividend yields. Today, there are lots of stocks on the London Stock Exchange with yields of 6% or more so it’s possible to build a portfolio yielding 6%.

But this might not be the case in a decade’s time. Today, more companies are opting for share buybacks instead of dividends.

Keeping things simple

Let’s keep things simple, though.

Let’s ignore inflation for now and say that one is simply looking for £5,000 a month in passive income.

And let’s also say that lots of UK dividend stocks yield 6% and higher indefinitely and that it’s possible to create a portfolio yielding 6% (without touching the capital).

In this scenario, one would need a million pound ISA to generate £5,000 per month in income.

Aiming for ISA millionaire status

Now, that obviously sounds like a lot of money to build up in an ISA. And it is.

But plenty of people have done it. Across the UK today, there are thousands of ‘ISA millionaires.’

What’s needed to get there? A combination of discipline (regular saving), patience, and most importantly, a sound investment strategy.

Put these three things together, and anything’s possible.

A sound investment strategy

Now, a sound investment strategy is going to mean different things to different people. For me, though, it’s a combination of funds and individual stocks, held for the long term.

I see funds as a good foundation for a portfolio. Stocks are like the icing on the cake – they can be used to target higher returns.

An example of a fund I like is the Vanguard All-World UCITS ETF (LSE: VWRP). This is a low-cost global index fund.

With this product, one gets access to over 3,600 stocks. And all the big names like Apple, Nvidia, and Tesla are in the fund.

This fund was only launched in mid-2019. So, it doesn’t have a long-term track record.

However, it has done well since launch, returning about 90% in total. That’s almost 11% per year.

Past performance isn’t an indicator of future returns, of course. Looking ahead, a global economic crisis could lead to much lower returns.

All things considered, however, I think it’s worth a look as a core holding. Fees are just 0.22% per year.

Turning to stocks, there are plenty of good ones out there today. Some names that could be worth considering include Amazon, Alphabet, and Intuitive Surgical.

Over the last decade, these stocks have all returned more than 20% a year. Again, though, past performance isn’t an indicator of future returns.

The post How much do you need in a Stocks and Shares ISA to target £5,000 a month in passive income? appeared first on The Motley Fool UK.

Both indexes have since rebounded strongly, reaching new record highs on 31 July. On Friday, 8 August, the S&P 500 closed at 6,389.45, 0.6% below its all-time high. Meanwhile, the Footsie closed at 9,095.73, 1% off its top.

America the beautiful

For long periods in history, returns from UK shares broadly matched those of American stocks. But since the global financial crisis of 2007/09, US stocks have thrashed British shares.

Over one year, the US index has jumped 19.6%, versus 11.4% for its UK counterpart. Over five years, this gap widens to 90.7% against 50.8%, respectively. Over two decades, the US market has made investors roughly twice as much as London. As legendary investor Warren Buffett cautions, “Never bet against America”.

The dividend difference

However, the above figures exclude cash dividends — payouts made by some companies to shareholders. Dividends are far higher from UK shares than US stocks, as American corporations often reinvest profits into future growth. Conversely, many UK companies offer generous cash yields.

Today, the S&P 500’s dividend yield is 1.2% a year. The FTSE 100‘s cash yield is 3.3% a year — almost 2.8 times as much. And when including reinvested dividends, gaps between these two markets shrink significantly.

Pricey problem?

It’s also worth noting that the S&P 500 is more highly valued than the Footsie. It trades on 24.8 times trailing earnings, 31.9% above its 10-year average of 18.8 times. The Footsie is on a multiple of 13.8 times historic earnings — inexpensive both in historical and geographical terms.

History suggests that buying high-priced assets leads to lower future returns. Therefore, the smart thing would be to sell my US stocks and buy UK shares, agreed? Alas, it’s not that simple, because US corporations typically grow their earnings faster than British businesses. So what can I do?

My free lunch

American economist Harry Markowitz once remarked, “Diversification is the only free lunch in investing”. Spreading risk around reduces volatility and improves long-term returns. Hence, I hedge my bets by investing as widely as possible.

Instead of choosing to invest in either the US or the UK, my family portfolio buys into both stock markets, plus many more. We do this via an exchange-traded fund, the Vanguard FTSE All-World UCITS ETF (LSE: VWRP). With shares listed in London, this passively managed investment fund charges just 0.22% a year.

In total, this ETF invests in 3,634 large businesses across stock markets worldwide, aiming to track the performance of the FTSE All-World Index, with dividends reinvested. The share price is up 15.3% over one year and 75.5% over five years. Admittedly, two-thirds of this ETF’s assets are in North America, but it still delivers global exposure.

Of course, when financial markets melt down again, this fund will tumble, but perhaps not as hard as the (more volatile) S&P 500. For me, this ETF handily combines American exceptionalism with global growth. It’s also huge, making its shares highly liquid and easy to trade. For these reasons, it’s become our biggest-ever passively managed shareholding!

The post Is it better to invest in the FTSE 100 or S&P 500? appeared first on The Motley Fool UK.

Here, I’m going to show how much money an investor could potentially build up in this type of ISA by the age of 50 (and 60) if they started contributing at 35. Let’s dive in.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The potential for substantial retirement savings

The annual allowance for the Lifetime ISA is only £4,000. However, for every £1 you contribute, the government will add in another 25p (up to age 50).

A risk-free return of 25% is an incredible deal. Contribute the full £4,000 and you’ll pick up an extra £1,000.

Let’s say that an investor puts the full £4,000 in every year, starting at the age of 35 (and picks up the £1k bonus every year). And let’s say that they are able to generate a return of 8% per year after fees.

I calculate that by the time they turned 50, they’d have around £152,000 (assuming the bonus rules didn’t change). That’s a significant amount of money.

Now, it’s worth pointing out that after 50, one can no longer contribute to a Lifetime ISA. And if one is using it for retirement savings, the capital can’t be accessed until age 60.

But if that £152,000 was left to compound for another 10 years at a return of 8% per year, it would grow to around £330,000. That could be a nice little bonus retirement pot next to one’s SIPP and/or Stocks and Shares ISA.

Obtaining 8% per year

How could one go about obtaining a return of 8% per year?

Well, one strategy that could potentially deliver this kind of return is investing in a global index fund such as the Vanguard FTSE All-World (Acc) ETF (LSE: VWRP). This fund – which could be worth considering as a long-term investment today – provides exposure to about 3,600 different stocks, including all the big names such as Apple, Amazon, and Nvidia.

Fees are low at 0.22% per year (you’d still have to pay platform fees most likely), which is good. Meanwhile, all income from the portfolio holdings is reinvested, meaning one can take advantage of the power of compounding (earning a return on previous returns).

It’s worth noting that over the last five years, this ETF has returned about 65%, which translates to about 10.5% per year. However, past performance isn’t an indicator of future performance and returns could be significantly lower if there was a meltdown in the economy and/or stock market.

I’d expect long-term returns to be more like 8%-9% per year. This assumes no huge swings in the value of the British pound.

Individual stocks for higher returns

I’ll point out that I’m a big fan of index funds like this. I see them as ideal ‘core’ holdings.

But I like to invest in individual stocks as well. Stocks are riskier than index funds, but they can offer the potential for higher returns.

Just look at Amazon (which could be worth considering today while it’s well off its highs). It has returned about 25% per year over the last decade meaning long-term investors have made a lot of money.

The post If a 35-year old puts £4k a year into a Lifetime ISA, here’s what they could have by 50 appeared first on The Motley Fool UK.

There are plenty of ways to try and source a second income, from owning buy-to-let property, to buying dividend shares, and starting an online side-hustle. Here’s one strategy I’m optimistic could give someone with a £20,000 lump sum, and the ability to make regular top-ups, the chance to make a an annual passive income above £45,000.

1. Reduce the tax burden

The greatest ‘expense’ that any of us face isn’t rent, bills, or even inflation — it’s tax.

Share investors, facing capital gains tax (CGT) of 18% to 24%, and dividend tax of between 8.75% and 39.35%, often pay tens of thousands of pounds to HMRC over time. Annual allowances of £3,000 for CGT and £500 for dividends do little to shield substantial allowances from the tax authorities.

And with tax rates on the rise, it’s more important than ever to reduce (or ideally eliminate) any payments one makes to HMRC. This can be achieved easily with the Individual Savings Account (ISA), for instance, via which Britons can save or invest £20,000 each year.

Given the potential for stronger long-term returns, Stocks and Shares ISA investors stand to benefit even more in tax savings compared to those using an (admittedly safer) Cash ISA.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

2. Diversify for growth and safety

Obviously the potential for greater returns means share investors have to absorb a higher degree of risk. Cash in the bank stays stable over time. Stock markets go up as well as down.

However, the possibility for truly life-changing returns may make share investing a better choice for many.

Investors can tailor their portfolios to manage the amount of risk they’re prepared to take. They could, for instance, consider building a portfolio of defence, utilities, healthcare and consumer staples stocks to help them balance growth and safety. Purchasing a healthy number of shares (say 10-15) across different industries can also protect returns from turbulence among one or two companies or industries.

An exchange-traded fund (ETF) holding a basket of currencies can be a quick and easy way to achieve this diversification. The Vanguard FTSE All-World ETF (LSE:VWRP) is one such financial vehicle I think is worth considering to spread risk.

A passive income creator

Tracking the FTSE All-World Index, this fund comprises of 3,624 blue chip shares and mid-cap growth stocks across developed regions. Just under 63% of its holdings are located on US stock markets, meaning investors have exposure to quality market leaders and innovators like Nvidia, Apple, Visa, Caterpillar and Palantir.

Since its creation in 2019, this Vanguard ETF has delivered an average annual return of 9.9%. That’s at the upper end of what share investors can realistically expect each year. And if this continues, someone with a £20,000 lump sum and £400 monthly put in this fund would turn this into £757,012 after 25 years.

This could then deliver a £45,421 yearly passive income if invested in 6%-yielding dividend shares. I think it’s worth considering, even if its high weighting to US stocks could leave it vulnerable to a possible Stateside recession in the near term.

The post £20k to spare? Here’s how investors could use that to kickstart a £45k+ passive income appeared first on The Motley Fool UK.