For many people, the question of when retirement will come is a difficult one to answer. The state pension age is set to increase to 68 by 2039. Therefore, it may feel as though retirement is moving further away. And with the cost of housing likely to rise in a loose monetary policy environment where demand continues to exceed supply, the prospect of retiring early may seem difficult to imagine.
However, by opening an ISA and investing spare cash in shares it may be possible to generate a surprisingly large nest egg in anticipation of retirement. Here are three reasons why having an ISA could make sense for individuals of any age.
The cost of having an ISA is now so low that they are accessible to everyone. For instance, the annual administration fee that I pay each year is £12.50. There are cheaper options out there, but at a cost of just over £1 per month, it seems to be a fair deal.
In terms of how easy it is to use them, there is little difference between an ISA and a normal share dealing account in that respect. In my case, the cost to deal is the same for both accounts, while the availability of funds and access to global markets is the same. There is also the option to make scheduled regular investments which can even be utilised as a one-off activity. They cut buying costs by over 80% and in the long run help to keep charges down.
While all of the contributions paid into an ISA are from post-tax income, once the capital is in the ISA it offers several tax advantages. Capital gains are not taxed, while dividends received are not counted towards the annual limit which was introduced by the current government.
These two factors make ISAs far more tax efficient than a standard share dealing account.
These two factors make ISAs far more tax efficient than a standard share dealing account. They mean that investors would probably be wise to use up their ISA allowance of £20k each year before considering investing via their share dealing account.
As someone who is not yet close to retirement, the flexibility of an ISA has huge appeal. Capital invested via a pension is locked away and cannot be withdrawn until at least age 55. This means that if the capital is required elsewhere in the meantime, such as for a new home, it cannot be withdrawn.
In contrast, ISAs offer much more flexibility. Money can be withdrawn from them at very short notice and while it cannot then be paid back into the account (above and beyond the annual allowance), it still provides greater flexibility than a SIPP or workplace pension.
Therefore, while the prospects for an early retirement may feel as though they are slipping away due to a squeeze on disposable income and an increase in the retirement age, ISAs can help to improve the outlook for an individual’s retirement plans. Given their cost, tax benefits and flexibility, they seem to make sense for the vast majority of people.
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