Stocks and Shares ISAs are a terrific wealth-building tool. Unlike a regular investing account, all capital gains and dividends earned inside an ISA are entirely tax-free enabling investors to boost their net worth without getting a visit from HMRC.
The only major limitation is that a maximum £20,000 can be thrown into this account a year. And that allowance is shared across all types of ISAs (such as Cash and Lifetime) that an investor may hold. Yet that’s still more than enough to build a chunky nest egg.
So let’s take a look at how to grow a £20,000 pot into over £100,000.
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.
Focus on the long run
There are always stories of investors making gargantuan returns in the realm of penny stocks. A small business manages to find huge success, propelling the share price by triple- or even quadruple-digit returns making shareholders exceedingly rich.
However, what’s often left out is the story of countless other penny stocks whose investors were left with nothing. Exploring this region of the stock market comes with lottery-like levels of risk. And while it can be prudent for some investors to gain exposure to this space, for most, it’s likely too high on the risk/reward scale.
Fortunately, even big, boring companies can yield life-changing results given enough time. By focusing on building long-term sustainable wealth, investors can unlock stellar returns from mid- or even large-cap companies without taking on as much risk.
Reaching £100,000
Since its inception, the FTSE 250 has rewarded investors with an average annualised gain of around 11%. And if we assume the index will continue to deliver this moving forward, it would take an estimated 15 years to turn a £20,000 lump sum into £100,000. And for those able to continue contributing an extra £500 a month, this timeline can be basically halved.
However, this is based on the assumption that the FTSE 250 will continue to deliver, which isn’t guaranteed. In fact, the average return over the last decade has been notably slower. So to overcome this problem, investors can turn to picking individual stocks within the ISA.
This strategy isn’t for everyone and certainly carries more risk compared to passive index investing approaches. But it opens the door to more meaningful returns, and even an extra 1% gain can work marvels in boosting wealth over the course of a lifetime.
A top stock to consider now?
The biggest challenge for stock pickers is actually finding the right businesses to buy. After all, there are a lot of options to choose from, and most won’t deliver market-beating returns. But one firm from my portfolio which shows a lot of promise is Howden Joinery (LSE:HWDN).
The company specialises in designing and manufacturing fitted kitchens and bedrooms. It sells all the components to tradesmen who subsequently install them in customers’ houses either in a new-build property or during the renovation of an existing one.
Despite most households slowing their spending, Howdens continues to eke out growth, defying expectations. It’s certainly not been completely immune to the economic environment, and there has been significant pressure placed on its margins. But with management taking a disciplined approach to expenses, the business is outperforming its parent index by a wide margin – a trend that I believe will continue in the long run.
