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According to NatWest, Britons are currently saving on average £226 a month. That’s a decent amount of money to use to build wealth in an Individual Savings Account (ISA). However, their ability to generate serious returns for later on depends on the exact product within this range of tax wrappers they choose.
Here’s one strategy that could turn that monthly investment into a substantial nest egg for retirement.
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.
An ISA plan
The Cash ISA offers enormous benefits thanks to its simplicity and low risk. Savers can enjoy a guaranteed return, and easy access to cash when they need it (if they opt for a non-fixed-rate account).
The trouble is that these products offer shockingly low returns compared with what can be made with share investing. According to Moneyfacts, the average Cash ISA has provided an average annual return of 1.2% since 2015.
By contrast, the Stocks and Shares ISA has delivered an average return of 9.6%. Given the long-term power of the stock market, this remains an achievable target with a diversified portfolio in my view.
Individuals can achieve this by building a basket of individual shares spanning different industries and regions. They can also purchase investment trusts and exchange-traded funds (ETFs) in their ISAs to give diversification a shot in the arm.
The Allianz Technology Trust (LSE:ATT) is one top trust to consider for spectacular portfolio growth. Since September 2020, it’s delivered an average annual return of 12.8%.
With large holdings in US tech giants like Nvidia, Microsoft, Alphabet and Apple, the trust gives investors the chance to capitalise on hot growth trends. These include artificial intelligence (AI), robotics and cloud computing. And with 50 holdings in total, it does so without too much exposure to any one company.
On the other hand, its cyclical nature means the Allianz Technology Trust could drop in value during economic downturns. Plus it’s exposed to the risks that all of the companies in it face. Yet I believe the possibility of big overall returns make it worth attention.
Targeting a near-£400k portfolio
So how could ISA investors balance risk and reward with ISAs? One option could be to maintain an 80-20 split between equities and cash.
Using this strategy, a £226 monthly investment would create a portfolio worth £394,990 after 30 years, based on the returns of the last decade.
Investors could give their pot an added boost by buying shares in a Lifetime ISA too. These products — which an individual must open by 40 years old — can be contributed to up until the age of 50. And they provide individuals with a £1 government top-up for every £4 of their own money, giving them extra money to amplify the compounding effect.
Those age restrictions and a £4,000 annual limit for investor contributions mean they’re not suitable for everyone however. Also be mindful that withdrawals before the age of 60 are in most cases subject to a 25% charge, unlike the Stocks and Shares ISA.
Regardless of the exact investing ISA chosen, I think considering a blend of shares and cash allocated across these tax wrappers is a great way to target long-term wealth.
