As everyone grows older, their thoughts inevitably turn towards retirement and how comfortable their lifestyle will be following the end of full-time work.
For some people, this brings a degree of fear and dread, since they may not have sufficient financial resources to be able to enjoy a comfortable retirement. And while starting to save and invest a portion of your income in younger years is definitely the best route to a financially secure retirement, even individuals who are close to retirement could still benefit hugely from opening an ISA.
That’s because an ISA affords an individual the opportunity to benefit from a simple, low-cost and tax-efficient means of saving for retirement. In terms of its simplicity, opening an ISA isn’t much more difficult than opening a standard share dealing account and these days can be done online in a relatively short space of time. Furthermore, all of the money invested through an ISA has already been taxed, so not only are withdrawals allowed at any point (unlike a pension), but they’re tax-free, too.
Furthermore, ISA management fees are normally equivalent to the cost of one online trade, while their tax advantages are highly appealing. For example, ISAs are capital gains tax-free, while the dividends paid for holdings within an ISA don’t currently contribute to an individual’s taxable earnings. As such, they’re a highly efficient means of saving for your retirement.
Do the math
In terms of the returns an individual may expect to achieve on investments, the FTSE 100’s return since its inception is perhaps a good guide. This is a 32-year period and during that time the UK’s main index has recorded a total annualised return of 9.1%. Assuming the same return for a five-year period and that the maximum ISA allowance is invested each year (£15,240 in the first year, then £20,000 per year for four years) gives a final figure at the end of the five years of £113,000.
This means that even if you’re 60 and have no pension in place, there may still be time to generate at least some kind of nest egg for retirement. And if you’re 55 and have at least 10 years to go before retirement, investing the full allowed amount in an ISA each year and generating a return of 9.1% per annum would lead to an end figure close to £300,000.
Clearly, it’s never too late to start planning for retirement, and investing through an ISA seems to be a relatively sound means of doing so. Certainly, the FTSE 100 has disappointed in recent years and over a five- or even 10-year period its returns may not match its long-term average. But with it seemingly offering good value for money, investing in the FTSE 100 through an ISA could be a great means of boosting your retirement prospects.