Imagine waking up in the morning with £1,000,000 to your name. Better than that, imagine it’s free of Income Tax, meaning you can take as much as you like, when you like, without paying HMRC a penny.
Sound too good to be true? Not for an estimated 1,365 people in Britain, who are now self-made ISA millionaires.
ISAs – or Individual Savings Accounts – are savings or investment accounts that shield your money from Income Tax and Capital Gains Tax. This means any growth, interest paid or income you take is tax-free.
While there are restrictions to the amount you can put into ISAs, there are those who have used these allowances wisely to generate a whopping £1,000,000 from nothing.
While it’s taken more than 20 years to reach millionaire status, it’s been achieved when the previous allowances meant the amount you could put into an ISA was substantially lower than the £20,000 you can put in one today.
All things being equal, it might be possible to reach a million even more quickly in the future. However, this will always depend on how and where you put your money.
Read on to learn which ISA is most likely to help you achieve millionaire status, seven ways you might improve your chances of success, and why using a financial planner is likely to be crucial.
1. Stocks and Shares ISAs are likely to offer better results
Individual Savings Accounts (ISAs) have been with us since 1999 and, originally, the maximum you could put into one was £7,000 a year.
Although today’s allowance is much higher, you still cannot roll any unused amount over to the following tax year. If you don’t use it, you lose it.
While you can put your money into Cash ISAs, it’s likely to take you longer to reach £1,000,000 as interest rates on savings accounts are historically low. According to This is Money, the average rate of interest on tax-free savings accounts fell from 2.2% to 0.4% in the ten years running up to January 2021.
Putting your money into a Stocks and Shares ISA allows you to expose it to greater long-term potential growth than a savings account – and not only in the last decade.
The chart below shows the difference in value between £1,000 invested in 1999 into a Cash ISA (blue bars) and a Stocks and Shares ISA (orange bars). The graph shows that a cash account was worth £1,115 in 2018, while a Stocks and Shares was worth £1,667.
Source: CityAM
2. Always invest for the long term
As demonstrated by the previous point, seeing your investments as part of a long-term strategy is essential. If you were to achieve investment growth of 5% per annum, it would take 25 years to reach £1,000,000 if you invested £20,000 annually. If you achieved 3% return, it would be 31 years.
Investing is not a “get rich quick” scheme, but research suggests it works. Take the 2019 Barclays Equity Gilt Study, which tracked the nominal performance of £100 invested in cash, bonds or equities between 1899 and 2019.
It also shows that £100 invested in cash in 1899 would be worth just over £20,000 in 2019. Not bad, you might be thinking, until you learn that if the money had gone into stocks and shares it would have been worth around £2.7 million.
3. Don’t react to the markets
Today’s ISA millionaires have seen the market go up, but also go down.
In March 2020, investors may have panic sold investments when the markets fell circa 30% due to Covid, but the investments have now probably recovered and potentially increased in value.
The illustration below shows the performance of the FTSE 100 in the last year, which, despite movements up and down, has risen overall.
Source: London Stock Exchange
We also had the global financial crisis of 2008, which wiped 30% off stocks and shares, yet in the decade following 2009 the markets saw one of its strongest ever performances, CNBC reported.
According to the report, the market regained more than 300% from its financial crisis low.
And the one thing all ISA millionaires are likely to have in common is that during the downturns they did not panic and disinvest; they left their money invested and waited for it to recover. When the market takes a downturn, typically it’s best to ignore the short-term fluctuations, sit tight and wait for the market to pick up again, and your investment with it.
4. Long-term compounded growth could dramatically increase the value of your ISAs
It’s said that Albert Einstein called compound interest “the greatest mathematical discovery of all time”, and it’s something that works with investment growth too.
Imagine investing £20,000 into your ISA, which grows by 5% in the first year, meaning you now have £21,000. If you earn the same 5% in year two, this is based on £21,000 not the original capital. This means in year three your investment is now worth £22,050.
Perhaps one way to think of compound interest is a snowball rolling down a hill getter larger and larger with time.
The main rule of compound growth, though, is that you don’t interrupt it. Moving your investment or disinvesting it is the same as picking the snowball up, meaning it cannot continue rolling and, therefore, cannot continue to grow.
Speaking to a financial planner can help you understand market movements and what could be driving them, allowing you to feel more confident about your long-term investment strategy.
5. Invest into your ISA at the beginning of the new tax year
Investing at the start of a new tax year means your money will be exposed to growth from as early as possible.
One of the common mistakes of investing in ISAs is waiting until the tax year end, as you will have lost nearly a year’s worth of potential growth by then. The table below, based on research by Fidelity, demonstrates how investing early in the tax year could provide increased returns over a ten-year period if the contributions for the decade total £158,960.
Source: Fidelity
6. Take appropriate risks with your investment
Every investment has to match your personal appetite for risk. That said, playing it too safe could result in smaller potential growth, meaning it will take longer to achieve your millionaire goal, or not achieving it at all.
When you are at the beginning of a long-term investment, it may be in your interest to look at a higher level of risk. While this does expose your money to greater potential fall in value should the markets drop, it also exposes you to greater growth potential when markets rise.
While you have time on your side for the markets to recover, exposing your money to greater risk may be the right decision.
A financial planner will be able to explain the risks involved with your investment and help you understand the levels of risk that may be needed. This will then give you the confidence to decide what level of risk you feel is appropriate to you and your long-term goal.
7. Speak with a financial professional
Working with a financial planner could help you achieve ISA millionaire status by:
- Helping you understand the complicated world of investments and the markets, so that you can decide where you would like to invest your money and the potential returns you will achieve
- Explaining the market and any market movements to you, helping you feel more confident about any decision you decide to take regarding your investments
- Providing information so that you can make informed decisions. This gives you peace of mind about where your money is invested, how much risk it is exposed to, and steer any subsequent action you may take.
Get in touch
If you are invested in using tax-efficient ISAs as part of your financial strategy, or would like to discuss your wider financial situation, please email hello@ardentuk.com or call us on 01904 655 330.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
