When it comes to saving for retirement, contributing to a Stocks and Shares ISA (alongside your pension) is a bit of a ‘no brainer’, in my view. With this type of ISA, you can grow your money at a healthy rate, completely free of tax, and access your money at any time.
Yet surprisingly, the majority of Britons completely ignore this ISA. Indeed, according to statistics from HMRC, in the 2018/2019 financial year, only 2.4m people across the UK contributed to a Stocks and Shares ISA. That equates to about 4% of the population.
If you’re saving for retirement and are yet to open a Stocks and Shares ISA, my advice is to consider opening one this financial year. This ISA is a very powerful savings vehicle. It could make a big difference to your wealth over time.
Join the ‘ISA Millionaire’ club
From a retirement saving perspective, the Stocks and Shares ISA has several key advantages.
One of its main advantages is that it enables you to invest in a broad range of growth investments including UK shares, international shares, funds, investment trusts, and exchange-traded funds (ETFs). Over time, these kinds of investments tend to grow your savings at a very healthy rate.
Take the popular Fundsmith Equity fund, for example. This fund, which is available through most Stocks and Shares ISAs, has returned more than 140% over the last five years. That means a £10,000 investment in Fundsmith five years ago would now be worth about £24,000.
Many top UK shares have done even better. Over the last five years, shares in retailer JD Sports Fashion have risen about 290%, turning £2,000 into nearly £8,000. Meanwhile, shares in online supermarket Ocado have risen about 630%, turning a £2,000 investment into about £14,500.
Of course, I’m cherry-picking examples here. Not all Stocks and Shares ISA investments have performed this well. But you get the idea. Whereas you’re only likely to pick up a return of about 1% per year from a savings account or a Cash ISA, it’s possible to achieve tax-free returns of 10% per year, or higher, in the long run, from a Stocks and Shares ISA. The key is to simply put together a balanced portfolio that contains a mix of investments.
Contribute £500 per month and earn 10% per year on your money and you’re looking at joining the exclusive ‘ISA Millionaire’ club in around 30 years.
Retire early if you want
Aside from the phenomenal range of investment choices, another big advantage of the Stocks and Shares ISA is its flexibility. With a pension, you have to wait until age 55 to access your money. Yet with a Stocks and Shares ISA, you can access your money at any age. Want to retire early? No problem!
It’s also worth pointing out that with a pension, you can only access 25% of your pension pot tax-free at age 55. Yet with a Stocks and Shares ISA, you can access all of your money tax-free.
Overall, the Stocks and Shares ISA is an amazing retirement savings vehicle. With its diverse range of investment options and tax benefits, it can help set you up for a comfortable retirement. I see saving into one, alongside a pension, as an easy retirement saving move.
The post Retirement saving: only 4% of Britons made this ‘no-brainer’ move last year appeared first on The Motley Fool UK.
- Here’s how I plan to turn £68.99 into a million by investing in UK shares
- The gold price has crashed! I'm buying UK shares to get rich and retire early
- Why I'd start planning for stock market crash part 2 today
- Stock market crash: Warren Buffett wouldn't touch these 3 FTSE 100 stocks, nor would I
- 10 UK shares I'd buy to start investing after the market crash
- Top shares for 2020
Edward Sheldon has a position in Fundsmith Equity. The Motley Fool UK owns no shares mentioned. 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