The State Pension currently amounts to just £8,546 per year. Since that’s less than a third of the average wage in the UK, it’s unlikely to provide retirees with the financial freedom that they desire in older age.
While that may be disappointing, generating a second income in retirement may now be simpler than ever. One means of doing just that is by opening and investing through a Stocks and Shares ISA. It provides tax efficiency, low costs and a straightforward means of withdrawing capital when it’s needed.
Simplicity
While pensions are normally fairly complicated products, an ISA is a simple means of planning for retirement. All contributions are made from capital that has already been subject to income tax, so they don’t benefit from a pension’s tax benefit in that respect. However, once ISA contributions are made, they’re not subject to income tax on interest earned, nor do capital gains tax and dividend tax apply. Over an individual’s lifetime, this could lead to significant savings that could improve their retirement prospects.
Furthermore, withdrawing money from an ISA is simple. Unlike a pension, where withdrawals are subject to tax on 75% of the total and there are various options available to an individual, withdrawals from an ISA are tax-free. They can also be made at any time – including before age 55 – and an individual can take as much or as little out of an ISA should they require the money before or during retirement.
Accessibility
Online sharedealing means that opening and managing an ISA is easy and low-cost. A wide range of providers are available, while costs are generally minimal for those who shop around. It’s possible to have a flat management fee for an ISA which is little more than the cost of a trade, while percentage fees that lead to higher costs for larger investors are not necessarily an industry standard.
Therefore, it’s possible to keep the cost of having an ISA to a minimum. This may benefit smaller investors for whom costs could significantly reduce their overall returns.
Timing
While the stock market has experienced a turbulent period as the Brexit process has progressed, valuations across the FTSE 100 and FTSE 250 suggest now could be an opportune moment to buy a variety of shares. The price-to-earnings (P/E) ratios and dividend yields on offer across both indices indicate that for investors who have a long-term time horizon, there could be significant opportunities to generate high total returns on offer.
With the State Pension age on the rise and the triple-lock potentially coming under pressure as the impact of an ageing population on the public’s finances begins to show, an ISA could be a worthwhile means for a wide range of individuals to generate a second income in older age.