Each year, UK investors can invest up to £20,000 in a Stocks and Shares ISA without paying capital gains or dividend tax, making it one of the most effective wealth-building tools in the country. But how much money could investors have made if they had maxed out their annual allowance over the last decade?

The answer depends a lot on how they invested that capital, so let’s look at the returns of some of the most popular strategies and determine how wealthy investors might be right now.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is for information purposes only. It is not intended to be, nor does it constitute, tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

Investing in an index

Thanks to the introduction of low-cost index funds, becoming an investor in 2024 is incredibly easy. Instead of learning the intricacies of stock selection and portfolio management, wealth building can be put almost entirely on autopilot by simply mimicking the returns of the stock market.

The FTSE100is home to the UK’s 100 largest companies by market capitalisation. And as these are industry giants, it is understandably one of the most popular destinations for capital due to its relative stability.

Over the last decade, the FTSE 100 has produced an annual return of almost 6%. By maximising the Stocks and Shares ISA’s annual allowance at this rate of return since 2014, investors would now be sitting on a portfolio worth around £273,200, invested from scratch.

It goes without saying that a quarter of a million pound ISA is nothing to be sniffed at, especially as the income is generated entirely passively.

Maximizing returns

Of course, not everyone can afford the luxury of putting aside nearly £1,667 in an ISA each month to use up their allowance. In fact, the vast majority of UK investors do not reach this limit every year.

The story continues

The good news is that by extending the time horizon, even small monthly deposits can still build significant wealth. Even just £100 a month can lead to significantly higher wealth if left to run for longer. However, for those willing to take more risk to speed up the wealth-building process, stock picking may be the better route.

Let’s take a look at RELX (LSE:REL). The information analytics company is not a household name, but it is actually one of the largest companies on the London Stock ExchangeAnd over the last decade, investors have earned an enormous return of 276%. And that doesn’t even include dividends.

On an annualised basis, that equates to a return of 14.2%. And if you maxed out an ISA at that rate for a decade, you could build a portfolio worth £437,100 – 60% more than the FTSE 100 would have returned.

The conclusion

Not all stocks have been as successful as RELX. And even that company has had its problems since 2014, suffering multiple double-digit declines over the years. At a price-to-earnings ratio of 35, the stock is undeniably trading at a steep premium, which will likely lead to more volatility in the years to come.

However, this shows that even if investors cannot use their entire ISA limit, stock picking may be riskier but opens the door to higher returns. But it is up to investors to take the necessary steps to make informed investment decisions when chasing RELX-like returns.

The post If I invested £20,000 in a stocks and shares ISA 10 years ago, this is how much I’d ​​have today appeared first on The Motley Fool UK.

Further reading

Zaven Boyrazian does not own any of the stocks mentioned. The Motley Fool UK has recommended RELX. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024