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Britons mostly don’t have to have enormous lump sums or purchase high-risk assets to build wealth. But history shows us that a patient approach to Stocks and Shares ISA investing can be an effective way to create a large fund for retirement.
The Individual Savings Account (ISA) is a great way to target passive income after investors finish work. The Cash ISA and the Stocks and Shares ISA shield savers and investors from capital gains and dividend tax.
Over time, this can mount up to tens (or even hundreds) of thousands of pounds. With reinvestment and the power of compounding, these savings can significantly accelerate wealth growth to provide financial security in later life.
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.
Here’s how prioritising investing in a Stocks and Shares ISA can create a handsome retirement fund.
The cost of security
Let me start by asserting the importance of the Cash ISA. Regardless of an investor’s goals, holding a certain amount of money in savings is generally a good idea to manage risk.
Unlike with stocks, where the value of my investment can fluctuate over time, my cash holdings remain 100% protected from volatility. But this security comes at a price. And over time, it can significantly impact chances of investing comfortably. Let me show you how.
Fancy a £419k portfolio?
According to insurance specialist Shepherds Friendly, the average Briton sets aside £421 each month for investments and non-investment savings. What would happen if someone parked the whole of this in the best-paying, easy-access Cash ISA on the market? That’s the 5%-paying product from Moneybox.
Over 25 years, that £421 would become £250,710. That’s not bad.
But there are two important caveats here. One is that it assumes interest rates will remain the same over that period. That’s a highly unlikely scenario. In fact, savings rates are collapsing as the Bank of England cuts interest rates.
The second is that this £250k is far lower than what someone could expect by also putting their money in a Stocks and Shares ISA.
Let’s say someone puts £100 in that Cash ISA each month, and the remaining £321 in a Stocks and Shares ISA. If they achieved a realistic average annual return of 9% on the latter, they’d have a total of £419,431 to retire on across both ISAs.
A top trust
Putting 75% of the leftover cash each month in riskier assets may not be for everyone. However, investing in a trust may be a more comfortable option to consider for cautious individuals.
Take the Finsbury Growth and Income Trust (LSE:FGT). Overseen by legendary investment manager Nick Train, this London-listed trust has holdings in 22 companies spanning multiple sectors.
These include consumer goods producers Unilever and Diageo, software developer Sage and financial services provider Hargreaves Lansdown. This approach helps to balance risk and reward, as well as provide a smooth return across all points of the economic cycle.
A large weighting of FTSE 100 shares also provides the trust with quality.
Its focus on UK equities means it carries more risk than more global funds. Yet since 2000, the Finsbury trust has delivered an average annual return north of 9%.
Past performance isn’t always a reliable guide to future profits. But trusts like this could be a great option for conservative and ambitious investors to consider.
