Image source: Getty Images
A Stocks and Shares ISA is a brilliant way of building up a pot of money for retirement. In contrast to a pension, there’s no tax relief on contributions, but the gains are free of income tax, dividend tax and capital gains tax when withdrawn.
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.
These three taxes can be big burdens, so that exemption is a massive benefit. And ISA investors can put away up to £20,000 a year, although that’s a lot of money. Only 7% pay in the maximum each year.
Wealth from FTSE 100 shares
An investor who did manage to hit the full allowance for 30 years could end up with more than £2m, assuming average annual compound returns of 7% from a basket of FTSE 100 shares.
If they upped that to 9%, through careful stock selection, that could rise to nearly £3m. These are only projections, of course. Investment returns are never guaranteed, but my figures do show the potential power of compounding.
Stocks and Shares ISA contributions don’t need to be anywhere near the maximum to make a difference. Putting in £150 a month (£1,800 a year) over 30 years could grow to around £182,000 with 7% annual growth.
Using the so-called 4% rule, the ‘safe’ withdrawal rate thought to protect capital, that pot could deliver income of £7,280 a year.
If growth averaged 9% over three decades, the pot could climb to £267,435, producing £10,697 a year of income. That’s ambitious, but it illustrates what regular long-term contributions might achieve.
Diploma shares keep rising
One company I’ve been watching is Diploma (LSE: DPLM), a specialist distributor of technical products that joined the FTSE in 2023.
The business focuses on niche markets where competition is limited. Growth comes through acquisitions and by expanding its existing portfolio.
The shares have been on a tear, rising 21% in the past year and 195% over five. My concern is that they now look expensive, with a price-to-earnings ratio of 55. For context, 15 is often seen as fair value.
At that rating, massive expectations are priced in, so even a slight stumble could send the share price lower.
Diploma has also faced turbulence, with its chief financial officer resigning this summer over conduct issues. But the long-term impact should be minimal.
Investment balance
Investors should approach Diploma with caution given today’s price. I think it’s one to keep on a watchlist and consider buying if a wider market sell-off drags valuations down. There are plenty more great FTSE 100 stocks out there.
A good aim would be to hold 15 to 20 shares spread across different industries, combining dividend income plays with growth stocks to spread risk.
The £182,000 I mentioned earlier is already a sizeable pot, and it could generate more income than the £7,280 I’ve quoted if some capital is taken too. My basic calculations show that with patience, discipline and regular investing, it should be possible to build a second income stream that could be the foundation of a secure financial future. Tax-free, of course.
