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The annual ISA deadline is fast approaching, giving investors the chance to withdraw up to £20,000 before midnight on 5 April. It is an undeniable opportunity for anyone who wants to harness the power of wealth building FTSE 100 again FTSE 250 shares, tax free within a Stocks and Shares ISA.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Investing in the stock market today can add up to incredibly large sums over time, helping to set people up for a more comfortable retirement.
Most of us can’t afford to save the full £20,000 into an ISA every year. That’s right. Even small, regular donations add up if investors stick with it, year after year. But one year of investing a full £20,000 can still make a big difference, especially for young people, whose money has decades to grow.
Wealth from 100 shares of FTSE
Take a 32-year-old who uses this year’s total allowance and let it grow until he retires at age 67. Let’s assume they reinvest every single dividend and earn a long-term total return of 7% per year. After 35 years, that £20,000 could turn into £213,532. That’s more than 10 times their original investment. Which seems like a good use of their money to me.
So how much would that bring in? Using the 4% rule, which suggests that investors who take 4% of their portfolio will not destroy their money, they will get £8,542 a year. If they invested in a UK share dividend yielding 5% on average and took that, they would earn £10,677.
It’s not enough to get a comfortable retirement benefit on its own, and future inflation will reduce its purchasing power, but it’s still a strong return from a one-year contribution to a Stocks and Dividends ISA. The key is to leave the pot untouched, and avoid leaving long-term savings to disappear into cash. Stocks can fluctuate in the short term, but over decades, compounding does its job.
GSK provides income and growth
Investors should aim to hold at least twelve stocks, which may be combined with a tracker fund that follows the FTSE 100 or S&P 500.
A pharmaceutical company GSK (LSE: GSK) would be a good place to start. It is a company that protects itself as people need medicine outside of the economic cycle. For years, GSK has been a blue-chip favorite, offering strong share price growth and a reliable dividend yield of more than 5% per year.
Then it fell behind as important treatments went off patent, forcing huge investments in its drug pipeline. Shares froze, and stocks struggled, but things are getting better.
GSK’s share price has risen 33% over the past year, yet it still looks reasonably priced at a price-to-earnings ratio of 11.7, below the FTSE 100 average of about 18. Its dividend yield is not as strong as it used to be at 3.35%, but forecasts suggest that it could reach 2025% with 3 dividends.
Developing drugs is always expensive and slow, and US prices are a concern, so the risks are still there. But GSK can be an important part of a balanced portfolio, composed of companies that offer high growth potential.
The most important step? Using that ISA. The sooner investors start, the longer their wealth must be compounded, and the greater the potential secondary income.
