Opening a Stocks and Shares ISA to buy cheap UK shares after the stock market crash may not sound like a good idea to many investors. After all, the uncertain economic outlook and poor recent performance of some companies suggests there are risks ahead.
However, the stock market could offer strong recovery prospects over the long run. Through buying a diverse range of high-quality companies in a tax-efficient account such as an ISA with £10k, or any other amount, you could improve your financial outlook.
The benefits of a Stocks and Shares ISA
Opening a Stocks and Shares ISA could allow you to obtain relatively high returns, with the added benefit of significant flexibility. Compared to a bog-standard sharedealing account, the tax advantages of an ISA are substantial. No capital gains, income or dividend tax are levied on amounts invested through an ISA. While in the short run this may not seem like a great benefit to some investors, over time it could significantly reduce your tax bill.
For example, UK investors are now only allowed to receive £2,000 in annual dividends before paying dividend tax. Therefore, should you wish to obtain a passive income from your portfolio in the long run, an ISA could lead to a higher net return.
A Stocks and Shares ISA also offers greater flexibility than other investment products. For example, withdrawals can be made at any time without penalty. This is in contrast to a Self-Invested Personal Pension (SIPP), where withdrawals can only be made closer to retirement. And, with the cost of opening an ISA being cheap, they’re accessible to almost all investors.
Buying cheap UK shares today
Investing in cheap UK shares in a Stocks and Shares ISA could be a profitable move. Following the stock market crash, many high-quality companies now trade at low prices as a result of weak investor sentiment. This may undervalue their long-term prospects, thereby providing investors with an opportunity to benefit from their share price recoveries.
Buying undervalued stocks may mean you outperform the wider stock market. After all, indexes such as the FTSE 100 have always recovered from their declines to return to record highs. This could make a positive impact on your ISA’s growth rate. And it could allow you to enjoy greater financial freedom in older age.
Of course, diversifying across a wide range of companies is crucial to reduce the risks within your Stocks and Shares ISA. Some industries and regions may post stronger performances than others. With the economic outlook unclear over the short run, buying a range of companies that can reduce your reliance on one sector or country could be a sound move. It may lead to more consistent returns. This may allow your ISA to grow at a faster pace over the coming years.
The post £10k to invest? I’d open a Stocks and Shares ISA and buy cheap UK shares today appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020