Stop missing out! A Stocks and Shares ISA could help you retire early
A Stocks and Shares ISA can help make the passive income dream a reality. With the right strategy, investors can aim for financial independence before they reach State Pension age.
The benefits donât seem like much, but they add up over time. And even for those who donât think they have much to gain, I think an ISA is the closest thing investing has to a no-brainer.
Stock market returns
Investing always comes with risks. And buying shares through the stock market almost inevitably comes with more danger than buying bonds or other fixed income assets.
The reason investors consider stocks, though, is because of the potential rewards. But given this, it makes almost no sense to pay taxes on returns unnecessarily.
Investors who donât use an ISA can find themselves paying taxes on capital gains and dividends. So they get the same risk for less reward, which isn’t the road to financial independence.
Anyone starting out with investing might think the difference wonât matter for a long time. But even for investors who are below the tax thresholds, an ISA can still be hugely important.
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.
Tax implications
One reason a Stocks and Shares ISA is important for investors starting out is that tax laws can change. Dividends up to £500 are currently tax-free, but that might not be the case in future.
Another is that share prices can move quickly. And this means investors can be eligible for taxes on capital gains sooner than they anticipate if things go better than they expect.
In both cases, itâs important to note that the ISA contribution limit resets each year. If you donât use your £20,000 allocation in one year, you canât use it in the following one.
As a result, investors who donât use a Stocks and Shares ISA from the outset can end up paying taxes unnecessarily. And this can delay â or even derail â future retirement plans.
Long-term returns
Rentokil (LSE:RTO) is a stock Iâm looking for strong returns from over the next few years. I think the firmâs scale gives it a strong competitive position as well as good growth prospects.
Whatever the world looks like when I retire, Iâve a strong feeling there are going to be pests. And Iâm equally convinced the FTSE 100 company is going to be dealing with them.
The risk at the moment is that itâs been taking a long time to integrate a huge acquisition. And thatâs resulted in higher debt and reduced financial flexibility.
With long-term debt coming down, Iâm looking for margins to expand. But whether itâs in 2026 or 2056, Iâm expecting Rentokil shares to worth a lot more than their current price.
Retiring early
The point of investing in the stock market is to participate in the growth of some great businesses. But paying tax on capital gains and dividends can cut into returns.
A Stocks and Shares ISA is an easy and effective way to minimise this. And thatâs why I think itâs the closest thing to an investing no-brainer that UK investors are likely to find.
Rentokil is just one of a number of FTSE 100 stocks Iâm looking at right now as I aim to retire early. But using an ISA to protect my returns is as important as buying the right shares.
The post Stop missing out! A Stocks and Shares ISA could help you retire early appeared first on The Motley Fool UK.
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Stephen Wright has positions in Rentokil Initial Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
