Winston Churchill famously said: “There is no finer investment for any country than putting milk into babies.” On a personal level, I’d say there’s no finer investment than putting money into a Stock and Shares ISA.
We can invest up to £20,000 per year into an ISA, and not pay a penny in tax when we take the money out. Not even if we build up a pot of a million or more.
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.
ISA millionaires
There are more than 4,000 ISA millionaires in the UK. Most have been at it for years, starting back in the old PEP days. And they use as much as they can of their annual allowances.
But I very much doubt a single one of them has made their million in a Cash ISA.
Don’t get me wrong, a Cash ISA has its place. It can be a great way to set aside some short-term cash. The returns are guaranteed, and there’s no stock market risk.
Someone who, in 2019, had some cash they needed for something important stashed in a Cash ISA would have been safe from the 2020 stock market crash.
What about risk?
For someone who really doesn’t want any risk at all, a Cash ISA might be better. And with today’s interest rates, I can see the attraction.
But how much risk is there in a Stocks and Shares ISA?
It depends on the timescale. Putting money away just for a year? We could hit something like 2020 and lose 13% of our money — that was the average negative return that year.
But over the long term, the risk falls off. And by the time we get to a 10 or 20-year timescale, the risk is low enough for me to not worry about it. That is, though, for individuals to decide for themselves.
It’s the dividends
Most of the risk is in terms of share prices, but that’s not what I look for.
No, my ISA cash goes mostly into FTSE 100 stocks. And I go for those paying good dividends. But what are dividends, really?
When a company tots up all its profits, works out what it needs to reinvest next year, and what it wants to keep as a safety buffer, there might be some left over.
That cash is typically divided out among the firm’s owners, which is us, the shareholders. And that’s what dividends are.
So how do I decide which companies are likely to pay the most cash?
Diversify
Well, I don’t really. I just look for firms that provide long-term essentials, and have long-term records of generating bags of cash. And I spread my ISA cash across them.
Going for diversification like this can really help lower the risk. Say, a bank, a housebuilder, a supermarket, an energy supplier… hopefully readers get the idea.
I don’t know what future returns from a Stocks and Shares ISA might get us.
But the FTSE 100 has managed an average annual return of 6.9% in the past 20 years. If I can get close to that, I reckon it should give me my best chance for long-term wealth.
