Becoming an ISA millionaire used to be nothing more than fanciful thinking, even for the very wealthy.
However, increased ISA tax-breaks in recent years, combined with strong market performance has resulted in many investors across the UK witness their ISA portfolios breach the seven figure mark (including a small number of Saunderson House [1] clients). In fact, recent estimates suggest there are currently up to 1,000 individual investors in the UK who have already surpassed £1,000,000 within their ISA accounts.1
Whilst some investors may only have considered pensions in anticipation of retirement, it is important not to overlook the key qualities of an ISA, especially given the recent reductions to the pensions annual allowance for higher earners. Not only are dividends, interest and capital growth free from tax, but any amounts withdrawn from an ISA are also completely tax-free. An ISA also offers great flexibility, as it can be accessed at any time.
There are a wide variety of different ISA types available with the current ISA allowance set at a generous £20,000 per person (with a £4,240 Junior ISA option for those under 18). Investment options available include cash and ‘stocks and shares’ which can be both direct shares and collective funds such as unit trusts and investment trusts. In addition, Lifetime and Help to Buy ISAs are also available which can be used to help fund property purchases and offer the added incentive of a government bonus of up to 25%2. Furthermore, savers now have the option of investing into Innovative ISAs that are made up of peer-to-peer loans; these cut out the ‘middle man’ and aim to provide higher interest than that available from a bank. The big risk with Innovative ISAs is that if the lendee defaults you may lose the capital invested. Unlike a bank account, there is no FSCS protection with these ISAs.
An investor can utilise the annual allowance by investing into a mixture of the above ISAs up to the limit of £20,000. However, with a view to becoming an ISA millionaire, we believe the most effective strategy will be to invest into an ISA that permits equity investments.
So how long would it take to build an ISA portfolio in excess of £1,000,000? If you made your first stocks and shares ISA contribution today, the ISA allowance remains level, and assuming a net growth rate of 6% (for reference UK equities have provided a real return (above inflation) of 5.6% over the last 50 years) it would take c23 years to become an ISA millionaire. When including a spouse’s allowance, it would take a couple just over 15 years to reach a combined £1,000,000. 2 Returns are, of course, never guaranteed.
ISA allowances should be utilised each tax year where possible, as they provide numerous tax benefits and are a key part of any efficient tax planning strategy. By investing into an ISA today you could be taking your first step on the road to becoming an ISA millionaire.
To find out more on ISAs and how tax planning in general can be used to help you and your family structure your affairs in a tax efficient manner, contact Saunderson House [2] and we will be delighted to help.
By Ed Wood [3], Chartered Financial Planner for Saunderson House
1 https://www.moneyobserver.com/our-analysis/beginners-guide-how-to-become-isa-millionaire [4]
2 Lifetime ISA (LISA) funds can only be drawn penalty free from age 60 (unless used to assist with a qualifying property purchase). Furthermore, only individuals aged from 18-39 can establish a LISA and contributions can only be paid to age 49. Nonetheless, they can form a very attractive addition to the standard ISA allowance. For simplicity, the calculations above exclude the option of contributing to a LISA, which provide a 25% ‘Government Bonus’ on contributions of up to £4,000 (i.e. a gross investment of up to £5,000 per tax year), which in turn use up part of the ISA allowance each year.