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The ability to invest up to £20,000 a year in an ISA and not pay a penny of tax on the income it produces can be life-changing.
In the 2023/24 financial year, the latest we have numbers for, UK adults held 15m ISA accounts. And the total amount invested in those ISA accounts came to £103bn! So we’re a nation of canny savers and investors, right? However, we need to dig deeper.
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Choose the right one
Of those 15m ISA accounts, 9.9m were Cash ISAs – and just 4.1m were Stocks and Shares ISAs. Cash ISAs held £69.5bn, but only £31.1bn – less than half that amount – went into Stocks and Shares ISAs.
A Cash ISA can be a great way to secure some cash for emergencies or short-term savings. And for people who don’t want the risk of the stock market at all, guaranteed returns offer a safe option. But over time, Stocks and Shares ISAs have wiped out the Cash ISA alternative.
The highest Cash ISA interest rate is currently just over 4%. And that’s actually not bad at all. But over the past 10 years, the average annual Stocks and Shares ISA return has been 9.6%.
The difference you can make
The total amount we will need to build depends on the rate of return we can get.
From that 9.6% return on Stocks and Dividends ISAs, around £132,000 should generate enough income to cover our £1,000 a month target. And investing £500 a month with all returns reinvested, we can get there in 12 years.
To achieve the same with a 4% return on a Cash ISA, we would need more than £320,000. And at that interest rate, it should take 29 years to build that.
To be fair, that 9.6% from stocks was above average for stocks in general. But 4% from cash can’t be saved when Bank of England (BoE) rates drop. I can easily see the Cash ISA interest rate falling below the BoE’s 2% inflation target. To take home £1,000 a month from a 2% return, we’d need more than £600,000 — and 56 years to get there.
A stock to consider
Legal & General (LSE: LGEN) paid a 7.9% dividend yield. And that alone, as long as we buy new shares in dividends each year, can go a long way in helping us reach our income goals.
Profits are not guaranteed, although during the first half results the company revealed that it had paid “more than £5bn in dividends and share buybacks over three years.”
The share price is up just 3.7% over five years. In fact it hasn’t moved much in ten years, after previous growth. But for me, the share price growth over my shares is really a bonus.
The insurance and investment industry is risky. And we have to expect ups and downs with the global economy and stock market sentiment. But as part of a diversified long-term portfolio, Legal & General is one stock that I think passive investors would do well to consider.
