As retail investors our investible universe is limited. The most attractive forms of investing for us are; ISA, pension, property, spread betting/CFDs, and entrepreneurial activity. There are more abstract views I could take such as education (‘investing’ in yourself), or gambling (using arbitrage betting strategies) – I will ignore these for now.

OK so with this in mind… I will (and I think you should) focus on investing in an ISA.

Firstly, what is an ISA? An ISA is a tax-free wrapper courtesy of the government. You can make investments inside an ISA, or outside an ISA. The only difference is that investments made inside an ISA are perpetually isolated from tax. To stop people putting all of their savings away in this tax free wrapper, you are capped at £20k annually. To invest ‘in’ an ISA you simply open an account with one of the many large and reputable ISA account providers.

Why?

1. Investing in a an ISA is near cost-less and setting one up can be done in a day or less
2. Lower risk than other investments which rely on borrowing money (such as buying a property with a mortgage)
3. Your much more likely to make money by investing in an ISA than leaving your cash in a savings account
4. Investments in an ISA are tax free. Literally… ZERO tax!

The benefit of not paying tax on investment gains is meaningful. Here’s an example below.

 

Note: This assumes an investor utilises their full ISA allowance every year which is currently £20,000.

After Year 5 the benefit is over £1,000 and by Year 10 you would have saved over £20,000 on your tax bill. As you’ll notice by looking at the ‘ISA Benefit’ column, the benefit rises every year and for long term investors this could grow to be even more substantial. The example above is reasonably conservative too… higher return assumptions would have magnified the benefit from having invested in an ISA. A portfolio with an expected capital gain of 10% would be £36,000 better off after 10 years!! It is also worth remembering that tax laws are subject to change and could be even higher in future. Any money locked away in an ISA is always isolated from tax.

Finally, and most importantly, an ISA is free and easy to set-up. The cost is zero and the benefit is £££! Regardless of what your savings goals may be, an ISA can help you reach them quicker… So, what are you waiting for?!