The stock market crash has caused a wide range of UK shares to trade at low prices. Over time, they have the potential to recover and boost the performance of your Stocks and Shares ISA.
This could reduce your reliance on the State Pension, which currently amounts to little over £9,100 per year. With other asset classes offering low returns compared to FTSE 100 and FTSE 250 stocks, now may be the right time to buy a selection of UK shares in a tax-efficient account such as an ISA.
Low valuations after the market crash
While the market crash has highlighted the potential for paper losses among UK shares, it could present a buying opportunity for long-term investors. Low valuations are currently present across numerous sectors, including banking, energy and consumer goods companies. Over time, many companies with low valuations today are very likely to recover as the economic outlook improves.
In fact, indexes such as the FTSE 100 and FTSE 250 have always recovered from their worst downturns to produce long-term growth. Investors who buy UK shares when they offer wide margins of safety, as many of them do today, have generally been rewarded with high returns in the long run. This recovery potential may help to build your ISA’s size over time, and could reduce your reliance on the State Pension in retirement.
UK shares versus other mainstream assets
Of course, the market crash may lead some investors to consider other asset classes than UK shares. They may, for example, prefer to hold cash or bonds due to their lower risks compared to FTSE 100 and FTSE 250 shares. Or purchasing buy-to-let property may be viewed as a better means of growing a retirement portfolio in the long run.
However, UK shares appear to offer better value for money than buy-to-let property. Although tax changes such as the stamp duty holiday are set to boost demand in the short run, they are temporary in nature. As such, with unemployment moving higher, a lack of housing affordability may lead to slower price growth. Similarly, the returns on cash and bonds are likely to lag those of UK shares due to low interest rates — even with the threat of a market crash. This may mean that they fail to provide an adequate nest egg to deliver a realistic income supplement to the State Pension in retirement.
Tax efficiency
Buying UK shares in a Stocks and Shares ISA is a tax-efficient means of capitalising on the recent market crash. No income tax, dividend tax or capital gains tax is levied on ISA investments, which will help them to grow more quickly over the coming years.
By investing in undervalued stocks now instead of other assets, you could further increase the value of your ISA in the long run. You may also overcome what continues to be a rather disappointing State Pension.