Want to start a Stocks and Shares ISA in 2025? There are great reasons to do so, but it’s easy to get off on the wrong foot.
They’re tax free
Am I mad to suggest that the tax-free status of an ISA is not a good reason to get one? After all, we can invest up to £20,000 per year and not pay any tax.
That’s on all profits, forever. So even the UK’s thousands of ISA millionaires won’t owe a penny to the Inland Revenue if they cash in.
Obviously, not paying tax is very desirable. All I’m suggesting is a variant on the old saying: “Don’t let the tax tail wag the investment dog.“
I think it’s key, primarily, to invest in something I can research and understand. And then, if there’s a tax-free way to do it, that’s a bonus.
Fortunately, for me, a Stocks and Shares ISA fits both these conditions.
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.
Get rich quick
It’s tempting to look at Nvidia, one of 2024’s big winners. It’s up around 180% in the past 12 months, and a huge 2,200% in five years.
“Wow, if I find 2025’s winner, I could get rich practically overnight,” one might think.
The problem is, finding last year’s winners is easy. Next year’s, not so much. And piling a whole load of cash into a stock that we think is likely to soar in the short term opens us to huge risk.
I’ve seen many promising tech growth stocks over the decades. Some have done very well. Some have crashed and burned.
So, thinking that buying shares in an ISA could be a way to quick wealth? I reckon that’s a dangerous way to approach it.
Build long-term wealth
That brings me to the number one reason why I invest in a Stocks and Shares ISA. I want to use one of my own picks, FTSE 100 insurance company Aviva (LSE: AV.), as an example.
We can see from that share price chart that it hasn’t been an overnight millionaire thing. But Aviva has a forecast dividend yield of 7%.
If someone invests £1,000 in Aviva shares, they should have £1,070 after one year’s dividend is added.
And another £70 in dividends after the second year? Actually, no. If they reinvest their dividends each year, they’d have an extra 7% of £1,070 which is £74.90. It’s only about a fiver extra, but thanks to the miracle of compounding, it should grow bigger year after year after year.
Every £1,000 invested annually at this rate could grow to £42,500 in 20 years. Or more than twice that at £98,000 in just a further 10 years.
ISA strategy
Dividends are never guaranteed. And the insurance sector carries plenty of risk, especially in the short term. So I go for diversification across dividend stocks from different sectors to reduce the risk.
And why choose Aviva as an example? The dividend closely matches the average total annual FTSE 100 return over the past 20 years. So I think it’s a realistic target.
This post was originally published on Motley Fool
