The Stocks and Shares ISA is a brilliant financial product. It allows Brits to invest up to £20,000 every year, which can eventually provide an excellent second income in retirement.
The truth is, however, that very few of us use all of our £20k annual allowance. Just 7% of us, in fact, according to HM Revenue and Customs.
But that’s okay. Even those who can only use half of their yearly allocation can build a significant second income with one of these tax-efficient products.
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.
Compound returns
This is thanks to two factors: the miracle of compound gains, and the strong long-term performance of UK shares.
Compounding is the concept of earning extra money on the money I’ve made. In terms of stock investing, it involves reinvesting any dividends I receive to buy more shares.
More shares means more dividend income, which, when reinvested, allows me to buy additional shares. This cycle continues, and over time, it can lead to substantial wealth growth.
As I say, though, this is only one part of the equation. The other thing I need to do is to invest in shares that provide a strong annual return.
Buying the big boys
So what instruments should I buy? Past performance is no guarantee of future returns. But the brilliant profits delivered by the FTSE 100 and FTSE 250 in recent decades makes them very attractive investments in my book.
The Footsie has delivered an average annual return of 8% over the long term. The FTSE 250, meanwhile, has yielded an even-better 11%.
I wouldn’t just choose FTSE 250 shares (or a index tracker fund) solely because of its superior returns. By also investing in Footsie stocks, I have a wider pool of stocks to choose from, which helps me manage risk.
The FTSE 100 is also less volatile, allowing for smoother returns across the economic cycle.
A top stock
Mega miner and commodities trader Glencore (LSE:GLEN) is one share I think investors should consider today.
The FTSE 100 firm sells and deals in multiple commodities like copper, cobalt, nickel, and aluminium. This means it provides investors with exposure to various hot growth trends including rapid urbanisation, increased digitalisation (and AI adoption), and rising renewable energy capacity.
With a strong balance sheet, it has the scope to invest heavily for growth and to continue paying dividends, too. Net debt to EBITDA was just 0.3 times in December.
One downside is that Glencore is also a significant coal producer. This could see it shunned by a growing number of investors on ESG concerns. Just today (26 June), Legal & General said it would remove the stock from several of its funds.
But on balance, I believe the potential benefits of owning Glencore shares outweigh the risks. And as part of a broader portfolio, it could help me enjoy excellent long-term returns.
A big second income
If we use past returns, a £10k investment — split over 12 months, and divided equally between FTSE 100 and FTSE 250 shares — could grow to an ISA worth a substantial £1,694,189. Again, I note that past performance is no guarantee of future returns — this is just to illustrate an example.
This could then provide a second income of £67,768, presuming I withdraw 4% of my pot each year.
This post was originally published on Motley Fool
