Every year, British investors get to invest up to £20,000 into a Stocks and Shares ISA without having to pay any capital gains or dividends tax. That makes it one of the most powerful wealth-building tools in the country. But how much money could investors have made if they maximised their annual allowance over the last decade?
The answer very much depends on how they invested this capital. So let’s explore the returns of some of the most popular strategies and determine how wealthy investors could be right now.
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.
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Investing in an index
Thanks to the creation of low-cost index tracker funds, it’s now incredibly easy to become an investor in 2024. Instead of learning the intricacies of stock picking and portfolio management, wealth building can be put almost entirely on autopilot by simply mimicking the returns of the stock market.
The FTSE 100’s home to the largest 100 companies in the UK by market-cap. And since it consists of industry titans, it’s understandably one of the most popular destinations of capital due to its relative stability.
Over the last decade, the FTSE 100’s generated close to a 6% annualised return. By maximising the Stocks and Shares ISA’s annual allowance at this rate of return since 2014, investors would now be sitting on a portfolio worth around £273,200 starting from scratch.
Needless to say, having a quarter of a million-pound ISA’s nothing to scoff at, especially since the returns are all generated passively.
Maximising returns
Obviously, not everyone has the luxury of putting aside close to £1,667 in an ISA each month to use up their allowance. In fact, the vast majority of UK investors don’t reach this limit each year.
The good news is by extending the time horizon, even small sums of monthly injections can still build significant wealth. Even just £100 a month can lead to significantly higher wealth if left to run for longer. But for those willing to take on more risk to accelerate the wealth-building process, stock picking might be the better route.
Let’s take a look at RELX (LSE:REL). The information analytics business isn’t a household name, but it’s actually one of the largest companies on the London Stock Exchange. And over the last decade, investors have reaped an enormous 276% return. And that’s before even counting dividends.
On an annualised basis, that’s the equivalent of a 14.2% return. And maximising an ISA at this rate for a decade would build a portfolio worth £437,100 – 60% more than what the FTSE 100 would have delivered.
The bottom line
Not all shares have enjoyed the same success as RELX. And even this business has had its challenges since 2014, suffering from multiple double-digit drops over the years. At a price-to-earnings ratio of 35, the stock’s undeniably trading at a lofty premium, likely inviting more volatility in the coming years.
However, it goes to show that even if investors can’t use their entire ISA limit, stock picking, while riskier, opens the door to superior returns. But it’s up to investors to take the necessary steps to make informed investing decisions when hunting RELX-like returns.
