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With a Cash ISA or stocks and Shares ISA, UK residents can retain 100% of the capital gains they make tax-free. But that doesn't mean they offer the same value in terms of potential profitability.
Studies show that over 10 years, a stocks and shares ISA can earn up to four times more on average than a cash ISA. Recently, high interest rates have made cash ISAs more attractive. But now that the Bank of England is considering further interest rate cuts, those days may soon be over.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Of course, it's not so black and white. Self-directed investments in stocks carry risks, especially for inexperienced investors. To avoid getting caught in a value trap, it is essential to conduct sufficient market research and choose the right stocks.
ISA cash back
With a cash ISA, investors will be able to earn net interest of around 4.5% at current rates. Even if that rate remained the same, around £400,000 would need to be held in the ISA to get £50 a day (£1,500 a month).
For a dedicated investor investing £500 a month in the ISA, it would take around 31 years to reach £400,000 (compounding returns).
stock market Returns
Unlike a cash ISA, share returns are not fixed, so we can only work with averages. According to an investigation by AJ BellThe average rate of return on a stocks and shares ISA is 9.6%.
At that rate, you would only need an investment of £187,500 to earn a return of £1,500 a month. Investing £500 a month, it would take 21 years.
€500 too much? Investing £250 a month would only take 27 years.
At that point, an investor could withdraw £1,500 a month or move the investment into a portfolio of dividend shares that make regular payouts.
Again, this is an average and the actual rate an individual investor experiences could be higher or lower. Plus, there's the added risk that a market crash could send the entire value tumbling.
<h2 class="wp-block-heading" id="h-considering-stocks“>Considering the actions
For investors willing to accept risk, a self-directed ISA is the clear choice. One type of asset that many early investors choose to simplify stock selection is an investment trust.
These typically provide exposure to a balanced portfolio of stocks selected by an experienced fund manager.
F&C Investment Trust (LSE: FCIT) is one of the oldest investment trusts in the United Kingdom. It was founded in 1868 as the world's first collective investment scheme.
The fund invests in a diversified mix of stocks and assets, making it more resistant to risk in specific industries or countries. However, it is still tilted more toward US technology stocks than other sectors. Think NVIDIA, Apple, microsoft…the usual suspects. A decline in this sector would hurt the share price.
Additionally, there is always the risk that the fund manager makes poor decisions, harming the fund's performance.
The fund also incurs an annual charge of 0.3% and an ongoing charge of 0.8%. Since January 2005, its share price has risen 497.4%, equivalent to an annualized growth of 9.35% per year. In addition to price growth, it pays a regular and reliable dividend with a yield typically around 1.3%.
I have yet to invest in the fund because I currently don't have extra cash, but I think it's great for long-term value investors.
