The Stocks and Shares ISA, along with the Cash ISA, can significantly bolster a person’s chances of enjoying a large passive income in retirement.
Why? They give people a chance to save and invest up to £20,000 a year without having to pay capital gains tax (CGT) or dividend tax. Over time, this can save even the average investor tens of thousands of pounds.
But here’s the thing: if not invested sensibly, these tax savings might not be enough to create a sufficient pot for retirement.
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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.
Here’s my plan
My own plan is to invest most of my spare cash at the end of the month in shares, trusts, and funds. I use my Stocks and Shares ISA and Self-Invested Personal Pension (SIPP) to do this.
Only a relatively small percentage is held in cash with products like my Cash ISA. This is because of the higher returns I can expect to make with stocks and other exchange-traded products.
On the plus side, my balance in a Cash ISA doesn’t go up and down according to the performance of financial markets. But I know that holding too much in cash could scupper my chances of a healthy income in retirement.
Let me show you how.
Targeting £500 a week
In this example, let’s say an investor is targeting a weekly passive income of £500 in retirement from their ISAs and other investments. That works out at £26,000 a year.
They plan to retire after 25 years, at which point they’ll draw down 4% of their retirement fund a year, ensuring that said fund lasts for around three decades.
To do this, the person would need to invest £525 a month to build a portfolio worth £650,000.
I’ve based this figure on the 9.6% average annual return that Stocks and Shares ISA investors have enjoyed over the past decade.
By comparison, the monthly investment someone would need to achieve that £650k retirement fund would likely be far higher if they used only a Cash ISA instead. Based on a 4% interest rate, they’d need to invest a whopping £1,265 in their savings account each month. It’s a figure that would be unachievable for many people.
A top ETF
As I say, Cash ISAs are great products for minimising risk. But Stocks and Shares ISA holders can reduce the danger to their capital by purchasing a trust or a fund.
The iShares Core MSCI World ETF (LSE:IWDG) is one such product that could help investors chase large returns with less risk than buying individual shares. In total, it spreads investors’ capital across 1,397 companies.
Around 73% of the fund is devoted to US equities, though the rest is invested pretty evenly elsewhere, providing added diversification by geography. These businesses straddle multiple sectors including information technology, financials, consumer discretionary, and healthcare.
I’m especially attracted by its high concentration of fast-growing technology shares. Major names here include Apple, Nvidia, and Microsoft.
Since 2020, this iShares global ETF has delivered an average annual return of 11.2%. Returns may disappoint during economic downturns. But on balance, I think it’s still an attractive option for long-term investors to consider.
