By investing in a Stocks and Shares ISA, British investors have access to a secret weapon that’s the envy of the world – the ability to grow wealth tax-free.
A regular savings plan paired with a sound investment strategy can compound even a modest monthly sum of £500 into a substantial nest egg. And with HMRC’s fingers being kept away from the profits and dividends, it helps pave the way towards a more comfortable retirement.
So for a 45-year-old who’s just started saving for retirement, how much money can they expect to have at the age of 65?
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.
Crunching the numbers
On average, the UK stock market’s historically generated a return of around 8% a year. But since ISAs allow international investing, it’s possible to leverage the extra gains from US tech stocks through an S&P 500 tracker fund to earn close to 10% – albeit with a more volatile journey.
With a runway of 20 years, investing £500 at a 10% average return compounds into a tax-free portfolio of £379,684 when starting from scratch. That’s more than double the average £145,900 pension wealth at this age, according to the Office for National Statistics. And following the 4% withdrawal rule, it roughly translates into a retirement income of £15,187 a year.
Aiming higher
Instead of relying on index funds, investors can strive to beat the market by picking individual stocks, owning only the best businesses.
Take Diploma (LSE:DPLM) as an example to consider. Over the last 20 years, the distribution services business has successfully integrated itself into the value chain of countless industrial companies, particularly within the aerospace and healthcare sectors.
Through a bolt-on acquisition and organic growth strategy, the company’s slowly consolidated an impressive market share in an otherwise fragmented sector. And the results are plain to see.
Even in the last five years, revenue and profits have been expanding by a roughly 27% rate. And with excess earnings being used to fund dividends, the stock’s generated a total return of 6,372% since 2005.
That’s a 23.2% average annualised return, enough to transform a £500 monthly investment into a staggering £2.5m!
Taking a step back
Needless to say, a tax-free retirement income of over £100,000 a year definitely sounds wonderful. But it’s important to realise that with a market-cap of £7.1bn, the prospects of Diploma replicating its past success are fairly slim.
Nevertheless, even if Diploma shares fail to generate further 23% annualised gains, demand for its services remains a top priority, especially now that tariffs are throwing even more challenges into an already complex global supply chain environment.
Of course, there are never any guarantees. Acquisition-heavy strategies can backfire if bad deals end up being made. And while Diploma does own a diverse portfolio of companies, the group’s revenue is nonetheless quite heavily concentrated within the aerospace sector – a notoriously cyclical industry.
A downturn in its key end-markets could slow growth. And while that might only be temporary, the stock’s lofty valuation could spark unwelcome volatility – a risk that investors must consider carefully today.
Personally, after looking at its track record, Diploma’s worthy of a closer look for investors seeking to build retirement wealth in a Stocks and Shares ISA. But there are other lower-risk opportunities to explore as well.
