Is an S&S ISA Worthwhile for Mr Average?
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squarebear99
Posts: 11 Forumite
I have managed to reach my half-century without ever opening an ISA, so as thoughts turn to old age I've finally got around to reading the Stocks and Shares ISA guide on this site.
This has made me query whether an S&S investment is really for people with a lot more cash than me who are probably at least ten years younger than me.
Assumptions/omissions
Stock market growth remains at 8%.
ISA charges not factored in.
No consideration made for different types of investment
Simple interest used in calculation.
So in year 1 my ISA has a value of 0 and it ends the year with a balance of 15000, then with growth of 1200 added we enter Year 2 with a fund valued at 16200. And so on for ten years ending with a fund of 217K.
Is this reasonable?
Assuming so (I don't know, I'm a total newbie at this kind of thing) then it seems it is only during Year 8 when I hit my CGT limit. And the CGT limit seems to be the point at which it is worthwhile having a S&S ISA.
So for people investing a lot less than 15K they might never get close to enjoying the tax advantages of a S&S ISA.
Is that right? Surely I've got this wrong. I do hope so.
This has made me query whether an S&S investment is really for people with a lot more cash than me who are probably at least ten years younger than me.
Assumptions/omissions
Stock market growth remains at 8%.
ISA charges not factored in.
No consideration made for different types of investment
Simple interest used in calculation.
year start end growth 1 0 15000 1200 2 16200 31200 2496 3 33696 48696 3896 4 52592 67592 5407 5 72999 87999 7040 6 95039 110039 8803 7 118842 133842 10707 8 144549 159549 12764 9 172313 187313 14985 10 202298 217298 17384
So in year 1 my ISA has a value of 0 and it ends the year with a balance of 15000, then with growth of 1200 added we enter Year 2 with a fund valued at 16200. And so on for ten years ending with a fund of 217K.
Is this reasonable?
Assuming so (I don't know, I'm a total newbie at this kind of thing) then it seems it is only during Year 8 when I hit my CGT limit. And the CGT limit seems to be the point at which it is worthwhile having a S&S ISA.
So for people investing a lot less than 15K they might never get close to enjoying the tax advantages of a S&S ISA.
Is that right? Surely I've got this wrong. I do hope so.
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Comments
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The only thing I can say for certain is that, having saved into s.&s. PEPs and later, ISAs, I now enjoy a totally tax-free income.
I've never been a higher rate tax payer, and so, for me, this was always the attraction of the tax-free wrappers.
I purposely started these investments so as to be able, eventually, to live on a tax-free income; and freedom from capital gains tax was and is a valuable bonus.
And I'm just an ordinary Mrs. Average.0 -
Who knows where legislation may lead us into the future. If there is a simple mechanism to shelter your funds from tax, now and into that uncertain future then it seems sensible to take it.0
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Is an S&S ISA Worthwhile for Mr Average?
yes.So in year 1 my ISA has a value of 0 and it ends the year with a balance of 15000, then with growth of 1200 added we enter Year 2 with a fund valued at 16200. And so on for ten years ending with a fund of 217K.
Is this reasonable?
That is an example using an example growth rate which may or may not reflect the growth potential of your investments. Examples are not reality. They are examples. You will not get a straight 8%. It will be variable with some years having much higher growth and other years having losses.Assuming so (I don't know, I'm a total newbie at this kind of thing) then it seems it is only during Year 8 when I hit my CGT limit. And the CGT limit seems to be the point at which it is worthwhile having a S&S ISA.
What about income tax?
CGT can become an issue when you get to around 70k plus. (although could be earlier depending on timescale)
There is also the admin issue. If you invest unwrapped then you need to maintain an accurate record of the buys and sales of the investments for the life of the investment and 6 years thereafter. You dont with an ISA.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
For me the advantage of not having to keep precise records of what I buy and sell is worth the relatively small price of putting my investments in a S&S wrapper- it can get complicated to work out any CGT liability when you have bought a number of tranches of shares over the years.
If you choose to invest a few thousand in individual shares, in a rising market its not that difficult to venture into CTG territory in a few years, even in many of the fairly conservative blue chip FTSE companies.0 -
squarebear99 wrote: »
So for people investing a lot less than 15K they might never get close to enjoying the tax advantages of a S&S ISA.
Is that right? Surely I've got this wrong. I do hope so.
It doesn't matter how much you invest in the S&S ISA, you can get benefits immediately.
One is the exemption from capital gains which kicks in with gains over £11k but of equal importance is not having to pay any tax. If you're a higher rate taxpayer or may be in future then it is really beneficial to have all your funds inside an ISA.
If you invest over a number of years then your portfolio can grow way beyond what you may have imagined. When I started I was age 26, putting in £25 or £50 per month. Over nearly 20 years that has grown and if it wasn't inside an ISA then it would be a big tax liability and cost me on my tax return.
Putting in £50 at the start I would never have thought there would be such a problem so it definitely is worth it, especially as for most investments there is no difference in costs.Remember the saying: if it looks too good to be true it almost certainly is.0 -
Yes
Great.That is an example using an example growth rate which may or may not reflect the growth potential of your investments. Examples are not reality. They are examples. You will not get a straight 8%. It will be variable with some years having much higher growth and other years having losses.
That's right. An example.What about income tax?
Do you mind expanding a bit on that? I can feel another example coming on.
Let's ignore tax allowances.
If I have to pay basic rate tax on 10K earnings and my investments earn me a further 9K then am I to pay income tax on 19K? I had assumed not. I thought that the 9K was within my CGT allowance and I would pay just on my 10K income.
I like the points several people made about the hassle of managing/administering investments. For me that is a big benefit.0 -
You are unlikely to be investing in 100% equities. Fixed interest investments can reclaim the tax in an ISA. They cant outside an ISA unless you are a non-taxpayer.Do you mind expanding a bit on that? I can feel another example coming on.
As the pot gets bigger, the income distributions on the investments will get bigger and this could push you into the next rate band and create an income tax charge.
Distributions do not fall under CGT. They fall under income tax.
Remember that an ISA doesnt cost anything. So, there is little point of not using the ISA wrapper.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
I would echo all the advice above that it can be very useful to you.
But I would also point out that given your age you should also be looking at pension contributions, which may be even more tax efficient depending on certain things0 -
squarebear99 wrote: »Let's ignore tax allowances.
If I have to pay basic rate tax on 10K earnings and my investments earn me a further 9K then am I to pay income tax on 19K? I had assumed not. I thought that the 9K was within my CGT allowance and I would pay just on my 10K income.
I like the points several people made about the hassle of managing/administering investments. For me that is a big benefit.
If you earn £9k income from investment then you have to pay tax on that income.
If you sell investments and make £9k profit then that would be within your cgt limit so no tax would be due.Remember the saying: if it looks too good to be true it almost certainly is.0 -
Everything the others have already said, plus - in your example you get into CGT territory in year 4, because it is the TOTAL gain your investment has made when you sell it that gets taxed, and you only get an allowance for the year you sell.
By total gain I mean the increase in value excluding dividends, interest and additional purchases.Eco Miser
Saving money for well over half a century0
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