Stocks And Shares ISAs – The Best Saving Tool Ever Invented
If you’re old enough, you’ll remember a time when you could put money in the bank, and they’d pay you interest – sometimes as high as five per cent. Unfortunately, those happy days are now well and truly behind us. Over the last ten years, central banks and their commercial counterparts have pushed down rates so low that the average saver can’t make any money. It burns away faster than it accumulates because of inflation.
There is, however, another savings vehicle you can use called a stocks and shares ISA. The rules for one of these are the same for a regular ISA. You can deposit up to £20,000 per year. But instead of just cash, you can invest in stocks and shares – things that actually make money over the long-term.
Personal tax is different when you use a stocks and shares ISA. Traditionally, you had to pay income tax on investment income above a set threshold, say £11,500. But with a stocks and shares ISA, you never pay any tax for life. No capital gains – nothing.
But Isn’t Investing In Stocks Risky?
Investing in stocks is risky, and there’s no guarantee that you’ll get a decent return. The trick here, however, is to know which instruments to buy, and which to leave to the professional day traders.
Very few people buy individual shares through these platforms – it’s just too dangerous. Company fortunes can turn on a dime, and their profitability can tank overnight. Just look what’s happened to British Airways following the coronavirus disaster. With its planes grounded, many investors are wondering whether the brand is worth anything at all.
You can, however, make buying stocks less risky if you diversify your portfolio and purchase lots of different types of shares. Some of them will go up. Some will go down, but the total value of your portfolio should average out and rise over time. Eventually, you should see the value of your investments piling up as compound interest begins to take hold.
You don’t have to go into the market and buy lots of individual stocks either. That sort of thing can get expensive! Instead, you can now buy ETFs which bundle them all into a single instrument. You just purchase how many you need at the ticket price and then watch their value grow as the years pass by.
Remember, in the long-run, the performance of the stock market reflects the performance of the economy. So ideally, you should invest in countries you think have the best chance of delivering excellent performance over the long-term in the future. The US is one option. But so too are innovative European countries like Sweden and even China. If you are based in the US, then take a look at this informative Stash review, it’s definitely worth investigating if you’re thinking of getting started with your investments.
How Does Tax Work?
The great thing about ISAs is that they are tax-free and very generous with how much you can save every year. Currently, you can put £20,000 into a stocks and shares ISA so long as you don’t use your cash ISA. It doesn’t matter how much the value of your original investment rises, you don’t pay a penny in capital gains tax, even if you make more than the threshold from your finances.
The gains you can make using this method are extraordinary over time. If you invest £20,000 per year for twenty years and get an 8 per cent return on your money (close to the historical average), your pot of cash could grow to be worth £1,008,000. More than £588,000 of that total is interest alone! Plus, when you take it out, you don’t have to pay income tax. It’s yours for life.
This setup differs from a regular share dealing account. If you open one of these and then take out your £588,000 in interest in one year, you’ll have to pay a 45 rate of income tax on it. And nobody wants to do that!
Is Investing £20,000 Per Year Realistic?
If you and your partner both have stable jobs, investing a large amount of money – like £20,000 is realistic. What it means is that if you stick it out, you can wind up with more than a million pounds in the bank. It seems unlikely if you have a regular job, but it’s just the way things work. Compound interest is one of the most potent forces in the universe. The longer you leave your money invested, the more it builds up, and you eventually wind up with a considerable net worth. Yes, it takes a long time, but if you’re a saver, that’s the ultimate prize.
*This is a collaborative post.
