Not only do stocks and shares ISAs have the advantage of all returns being tax free but, if you reinvest any interest or dividends you earn from your investments, you\u2019ll benefit from an effect known as compounding. We outline how stocks and shares ISA compound interest works and how it can benefit you.<\/p>
Put simply, it\u2019s interest on the interest that you\u2019ve already earned.<\/p>
Let\u2019s take a simplified example (that assumes no tax is payable on the interest you earn). Imagine that you put \u00a31,000 into a cash savings account<\/a> paying an annual 5% interest rate. At the end of the first year, you\u2019d have \u00a31,050 \u2013 your initial \u00a31,000 deposit, plus \u00a350 of interest.<\/p> Assuming you make no withdrawals, the next year you\u2019d earn interest on the full \u00a31,050 \u2013 totalling \u00a352.50. The next year you\u2019d have \u00a31,102.50 to earn interest on, and so on.<\/p> With simple interest, on the other hand, you\u2019d only ever earn interest on your initial deposit of \u00a31,000 (\u00a350 interest a year).<\/p> The cumulative effect of compound interest may not initially seem all that great, but \u2013 as our worked example, below, shows \u2013 over time it can really add up.<\/p> While interest is more commonly associated with cash savings, and investments with capital growth, there are some investments that pay a form of interest too. These include:<\/p> In addition, many trading platforms now pay interest on uninvested cash held in a stocks and shares ISA<\/strong>. And because it\u2019s an ISA, that interest isn\u2019t subject to tax.<\/p>Which investments pay compound interest?<\/h3>
Does a stocks and shares ISA earn compound interest?<\/h3>