How buying cheap UK shares in August could turn an empty ISA into £535,823!

It’s a great time to buy high-quality UK shares at discounted prices. Years of poor performance mean that both FTSE100 AND FTSE250 The indices are full of great, cheap stocks.

With a tax-efficient Stocks and Shares ISA I can invest up to £20,000 a year in shares, funds and other financial instruments. This could save me a fortune in tax payments over time.

As I will show here, one of these products could ultimately help me go from having zero assets to a whopping sum in excess of £535,000 in just a few decades.

Please note that tax treatment depends on each client’s individual circumstances and may change in the future. The content of this article is provided for informational purposes only. It is not intended to, and does not, constitute tax advice of any kind. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Breakdown of my investment

As I said, buying stocks in August is an attractive idea, given how cheap they are now. But I wouldn’t put all my money into stocks today. I’d like to put my capital in higher-risk assets like stocks, alongside lower-risk assets like savings accounts.

This helps me spread risk and provide a smooth return over the economic cycle. Fortunately, I can achieve both with ISA products.

As the name suggests, a Cash ISA works like a standard savings account, but with the added bonus of tax efficiency. Meanwhile, a Stocks and Shares ISA allows me to aim for a higher return from riskier products.

How much I put into each ISA will depend on my own investment goals and attitude to risk. There is no set formula, but one strategy could be to invest 80% in shares and 20% in cash each year.

High profits

With that in mind, I would need to choose the stocks I wanted to buy. My priority would be to choose cheap stocks because they could increase my chances of getting above-average returns.

The point is that value stocks often produce faster capital growth than the market once the market finally realizes they are cheap.

The next step would be to buy a mix of FTSE 100 and FTSE 250 shares. The average long-term return for these indices is 9.3%. That’s the sort of amount that could take my ISA from £0 to over £500k in a couple of decades.

If I were to receive 5% interest on my ISA savings account, a £10,000-a-year investment, spread over 80% in cheap shares like these and 20% in cash savings, could turn into £535,823 over 20 years.

IS	Monthly investment	Speed ​​of growth	Total
Stocks and Shares ISA	£666.67	9.3%	£466,864.14
Cash ISA account	£166.67	5%	£68,959.10

One FTSE 100 opportunity

Phoenix Group Holdings (LSE:PHNX) is one such company that I believe is currently severely undervalued.

City analysts expect full-year earnings to rise 43% in 2024. That makes the Footsie firm trading on a price-to-earnings growth (PEG) ratio of 0.4. As a reminder, anything below 1 means the stock is undervalued.

On top of that, Phoenix Group shares currently yield a whopping 9.9% dividend yield.

It’s a company with significant long-term potential. On the one hand, the financial services sector is incredibly competitive, which means Phoenix has to row very hard to succeed. The ongoing decline in the housing market could also hurt the company’s mortgage portfolio.

But its formidable brand strength and cash-rich balance sheet make it a formidable player in its own right. And with demographic changes driving demand for savings and retirement products, it has a great chance to grow revenue in the coming decades.