If a 40-year-old puts £500 a month into a Stocks & Shares ISA, here’s what they could have to retire on

The Stocks and Shares ISA has, since its introduction in 1999, provided a vital tool in helping Brits to create wealth for retirement. Their importance could rise still further if — as expected — major changes are announced to the Cash ISA next month.

Rumour has it the Treasury will cut annual allowances on these cash products to boost inflows into their share-based equivalents. I’m not totally opposed to this idea, as history shows that investing in equities typically delivers far better returns.

With this in mind, here’s how much money a 40-year-old could have by retirement if they invested £500 in a Stocks and Shares ISA.

A 9.64% return

Unlike with a Cash ISA, users of these products don’t enjoy the luxury of a guaranteed return. In fact, returns can fluctuate wildly according to stock market conditions. In theory, their value can also decline all the way to zero.

Yet over the long term, Stocks and Shares ISAs continue to provide greater gains that cash-based products. Past performance doesn’t always provide a reliable guide to the future. But it is certainly worth paying serious attention to.

According to Moneyfarm, the average annual return on a Stocks and Shares ISA over the last decade is 9.64%. That’s significantly higher than the 1.21% that Cash ISAs have provided.

If this continues, someone who invested £500 a month between 40 and the retirement age of 68 would have a healthy retirement fund of £853,217.

Conversely, that amount put into a low-yielding Cash ISA would have turned into just £199,846.

It’s possible that cash savers will get an improved return over the next 10 years, as the era of ultra-low interest (and therefore savings) rates appears over. Yet it’s still likely, in my opinion, that Stocks and Shares ISAs will provide far better gains.

Taking the right path

With all capital gains and dividend income tax free, a Stocks and Shares ISA can be a far more effective way to build wealth than a general investment account (GIA). Yet investing without a sound strategy can result in an annual return far below than 9.64% average.

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 key tool to target high annual returns is to build a diversified portfolio of assets. Owning a range of shares allows risk to be effectively spread, and for individuals to capture a variety of growth and income opportunities.

Investors can also buy investment trusts or exchange-traded funds (ETFs) to achieve this diversification effect. The Polar Capital Technology Trust (LSE:PCT) is one such security I think is worth a close look.

On one hand, its narrow focus on tech shares can leave it vulnerable during economic downturns. But over the long term, it has the potential to surge in value thanks to fast-growing segments like artificial intelligence (AI), quantum computing, robotics, and cloud infrastructure.

With holdings in more than 100 companies (including sector giants Nvidia, Microsoft, and Apple), it provides a multitude of ways for investors to profit from the ongoing digital revolution. Since 2015, it’s delivered an average annual return of roughly 20.6%.