Over time, buying equities and other assets in a Stocks and Shares ISA can save the typical investor tens of thousands of pounds in tax.
Accountancy firm BDO estimates that all ISAs — including interest-paying Cash ISAs — cost the UK Treasury almost £5bn every year in tax relief.
Maximising returns
By saving a fortune in tax, ISA customers can substantially boost their chances of making a life-changing return on their money. This is becoming increasingly important as the amount of money required to retire comfortably sharply rises.
The Living Wage Foundation says that the average Brit requires an annual income of £19,300 a year for just a basic standard of living. However, the exact amount may be as high as £28,400, depending on an individual’s relationship and accommodation status.
By following these steps, an ISA investor could save themselves having to worry about poverty in retirement. I calculate that they could enjoy an annual passive income of £23,352 on top of their State Pension.
Building a winning portfolio
Investors have literally thousands of global stocks they can buy in an ISA. This provides a world of opportunity for individuals to spread their money across many different companies, industries, and regions.
As a consequence, share investing can be used to help individuals manage their risk. And if done correctly, investors can limit the risk to their capital without sacrificing the possibility of making monster returns.
Harry Markowitz, investing guru and inventor of the Modern Portfolio Theory, famously stated that “diversification is the only free lunch in investing“. And investors don’t necessarily have to achieve this by building a large portfolio of individual shares.
Tech titan
Investing in a trust can be a quick and cost-effective way to achieve instant diversification. F&C Investment Trust (LSE:FCIT), which has holdings in 400 companies spanning 35 countries, is one such company I think investors should consider.
With £6bn in assets today, it’s been in existence since 1868, making it the world’s oldest investment trust. Almost two-thirds of its funds are tied up in North American equities, while it also provides solid exposure to the UK and Mainland Europe.
It is also extremely tech heavy, with Nvidia, Microsoft, Apple, Alphabet, and Amazon marking its five largest holdings.
This high weighting of tech shares could leave the trust vulnerable during economic downturns. But it also provides excellent growth potential thanks to phenomena like cloud computing, robotics, and artificial intelligence (AI).
A near-£2,000 income
During the past 10 years, the F&C Investment Trust has delivered an average annual return of 11.3%. This is excellent proof of Markowitz’s theory that diversification needn’t mean poor returns.
Past performance is no guarantee of future returns, of course. But if the trust’s recent rate of return continues, a £20,000 lump sum investment today would, after 30 years, turn into a pension pot of £583,982.
Drawing down 4% of this each year would then provide a £1,946 monthly passive income.
