The Stocks & Shares ISA is a highly-effective product for long-term saving and investing. Yet many British adults don't own one. In fact, 40% of the population don't even know what a Stocks & Shares ISA is or how it works, according to recent YouGov statistics.
If you're one of them, I'd urge you to consider opening one if you're serious about generating long-term wealth. Here are three reasons why this kind of ISA is such an effective investment vehicle.
The main advantage of Stocks & Shares ISAs is that unlike Cash ISAs (which can only hold cash), they allow you to invest in a broad range of growth assets such as shares, mutual funds and exchange-traded funds (ETFs). As I explained recently, if you're looking to generate wealth over the long term, these are the kinds of assets that you want to be investing in.
For example, through a Stocks & Shares ISA you could invest in the Lindsell Train UK Equity fund, which is co-managed by star portfolio manager Nick Train. Over the last five years, this fund has returned almost 90%, smashing the returns from cash savings. Or you could invest in an international one such as the Fundsmith Equity fund, run by Terry Smith. Over five years, this has returned more than 150%. Alternatively, you could pick individual stocks yourself. With a Stocks & Shares ISA, you can buy stocks such as Lloyds Bank or GlaxoSmithKline in just minutes. The ISA gives you many options that a cash one doesn't.
At the same time, it is a tax-free product. That means that any interest or capital gains that you generate are sheltered from the taxman and yours to keep in full. Don't overlook this benefit - it's a huge one that could have a significant impact on your wealth over the long term.
For example, let's say you bought £5,000 worth of shares in a company at a price of £1 per share five years ago and your salary is £50,000 for tax purposes. The shares have done well since you bought them and now trade at £4 per share, meaning your investment is now worth £20,000. Naturally, you want to sell the stock and lock in your profits.
Normally, you would have to pay tax of around £650 on the gain generated by the shares. However, if the stock was held in a Stocks & Shares ISA, the gains would be tax-free. Paying as little tax as legally possible is generally a smart move if you're looking to maximise your wealth.
Lastly, a third advantage of the Stocks & Shares ISA is that it's a very flexible product as your money is not locked away for the long term. If you need your money, you can withdraw it whenever you want, although this may impact your ISA allowance for the year.
Other retirement savings products are more restrictive. For example, money in a Lifetime ISA must be kept in the account until you either buy your first property, or turn 60. Similarly, money invested in a self-invested personal pension (SIPP) can't be accessed until you're 55. So, the fact that you can access your savings and investments in a Stocks & Shares ISA makes it a great product for those looking for flexibility.
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Edward Sheldon owns shares in Lloyds Bank and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. 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.