We all love a millionaire story, whether it’s a lottery winner or when somebody wins one of those £3m house draws. You may also have noticed talk in the financial press about ISA millionaires. So, what are they and how can you join the growing band of people with a seven-figure ISA portfolio?
A little background. An ISA is effectively a tax-break that allows you to save up to £20,000 tax-free, each year. The main options are cash ISAs and stocks and shares ISAs, though others include the lifetime ISA, the junior ISA and the innovative finance ISA.
Are there really ISA millionaires?
Almost 5,000 savers had ISA portfolios worth £1m or more as at the end of the 2021/22 financial year, according to the most recent HM Revenue and Customs (HMRC) figures. That figure is likely to be a fair bit higher now.
Perhaps the best known is Lord Lee of Trafford, the Lib Dem Peer and former Conservative MP, generally thought to be the first ISA millionaire. He built his portfolio in Personal Equity Plans (PEPs) and then ISAs, before setting out his investment principles in his 2014 book, ‘How To Make a Million – Slowly’.
All those ISA millionaires will have put most or all of their money into stocks and shares ISAs rather than cash ISAs, particularly given the low interest rates of much of the past 15 years. Someone who put the maximum allowance into a cash ISA since they were launched in 1999 would have around £275,000 to show for it – a useful amount, but a long way short of seven figures.
How much do I need to invest to become an ISA millionaire?
To become a millionaire, you need to use your full £20,000 ISA allowance every year for about 21 years and pick some good investments. So, if you’re 30 years old now, then you too could be a millionaire at 51.
That’s based on 8% annual growth before charges, which can drag performance down. Just 1% of additional investment charges per year will turn your £1m into £930,000. Remember that each 1%, or fraction thereof, can lose you tens of thousands of pounds over the duration of your investments.
But you can still do it with a lower growth rate – it just takes more time. If your investment returns averaged 5% a year you could still become an ISA millionaire in around 25 years.
If your investments grew by 7% net of fees (wishful thinking maybe), you could shave three years off that period, achieving £1,048,722.82 in 22 years. But if your investment experienced annual growth of 3%, it would take 31 years to reach a seven-figure sum (£1,030,055.17).
Any tips?
It helps to be patient, consistent and willing to ride out the ups and downs of the stock market over time. As Lord Lee said, “you need two things to be successful at investing: common sense, and patience. The second is the most important, but unfortunately too many investors chop and change too often.”
Remember, much of the work is done by the power of compounding – the snowball effect that occurs when you reinvest your investment growth so that it then goes on to generate its own growth. Check out the five simple rules for investment success.
Picking investments is the harder bit but most DIY platforms have recommended fund lists and portfolios and if you choose a robo-style digital investment provider, they pick the investments for you based on your risk profile.
Don’t forget to go to our comparison tools and check you’re getting the best value for money from your investment provider.
Photo by Minerva Studio on Canva
