I think the decision to extend the ISA allowance to £20,000 may have backfired by deterring some people from investing in UK shares, rather than encouraging them.
The Stocks and Shares ISA allowance is now so big, friends tell me they won’t even come close to using the full amount, so don’t bother investing at all. They have concluded that investing in UK shares is only for the super wealthy, not for them. I think they’re wrong.
I reckon that investing in top UK shares is one of the best ways of building wealth for my retirement. And I don’t need to invest £20,000 a year to take advantage of them. In fact, I would start with much, much less.
I’d buy UK shares little and often
Yet my friends say the inflated ISA allowance has taken away their urgency. When it was £7,000 a year, they raced to use their allowance before they lost it for good at midnight on 5 April.
They can’t get so worked up about it now. Why worry about missing out on this year’s £20,000 allowance when they will get another massive allowance on 6 April? The upshot is that some have become too relaxed.
I’m not doing that, because I know investing is a long-term game and you have to stick at it to succeed. It’ll take me 35 or 40 years to build enough wealth to retire on, from rising UK share prices and compounding dividends.
So I would ignore that £20,000 limit and start small by investing £50 a month instead. Drip-feeding money into UK shares every month has two big advantages. First, it smoothes over the ups and downs of stock market volatility, helping me sleep at night. Second, I actually benefit when stock markets fall, as my monthly contribution picks up more stock. Actually, there is a third advantage. After a while, I won’t even notice the money leaving my account, but will budget around it.
I can’t use all of my ISA allowance
If I invested £50 a month in UK shares and they rose at an average rate of 6% a year after charges, I would have £98,429 after 40 years. If I increased my monthly contribution by 3% each year, to keep up with rising pay and prices, I would have £148,902.
My small monthly acorns will have grown into something substantial, even if it has taken me decades. I wouldn’t stop there. I would also throw in lump sums, too, whenever I had a bit of extra money to hand. And I’d review and increase the amount I invested monthly if I could afford to as well.
What I wouldn’t do, is worry about using my full £20,000 ISA allowance. I can build a big enough nest egg for my retirement, by investing a fraction of that in UK shares.