There’s a common misconception that ISAs (Individual Savings Account) are overly complicated, which may be the reason why many people either avoid using them or – according to recent research conducted by HM Revenue and Customs – only two-thirds of those earning more than £150,000 a year fill their annual ISA allowance. But, thanks to the £20,000 ISA limit that was introduced in April 2017, there’s never been a better time to use ISAs to your advantage. In fact, if you’re harbouring dreams of becoming a Millionaire, an ISA might get you there sooner than a lottery ticket, an unexpected windfall, or an ill-advised excursion to the casino.
What is an ISA?
Simply put, an ISA is a tax-free account for your savings or investments. ISAs were originally introduced in 1999 as a replacement for the share-focused Personal Equity Plan (Pep) and the cash-focused Tax Exempt Special Savings Account (Tessa). In the early days, ISAs offered a £7,000 allowance for stocks and shares, of which £3,000 could be used for cash. This allowance rose to above £10,000 in 2010 and then reached £20,000 in April 2017, which is where it stands today.
The £20,000 maximum for 2018/19 can be saved in a single ISA or across a mixture of ISAs, and there are a lot of different ISAs to choose from: cash ISA, stocks and shares ISA, innovative finance ISA, Help to Buy ISA or Lifetime ISA. Note: there is a limit to how much you can put into all of them.
Defining an ISA Millionaire
The original ISA Millionaire was somebody who began saving or investing with Peps and Tessas back in the late 1980s/early 1990s and then, when ISAs were introduced, has continued to save or invest up to the current date. Each year they use their ISA allowance up to its limit and, thanks to a combination of dedicated saving habits, funding and growth, have managed to accrue investments reaching £1m.
John Lee, who became Britain’s first self-declared ISA Millionaire in 2003, achieved his fortune by investing his maximum annual allowance in smaller companies and then reinvesting the dividends. In interviews, he’s said his strategy is to avoid backing start-ups and, instead, go for established businesses. He also looks for both growth and capital preservation and limits the extent of falls by operating a twenty per cent stop-loss order.
According to Andrew Craig, author of How to Own the World, there are two ways to becoming an ISA Millionaire – either “slow and steady” or being aggressive but “extremely lucky”. In a 2016 article for Shares Magazine he suggested, “A good stock-market based fund in an investment ISA has a good chance of making a great deal higher return and doing so perfectly safely over eighteen years if you choose the right kind of fund and pay into it regularly each month or each year.”
Becoming an ISA Millionaire is more possible than ever
There are differing estimates on how many ISA Millionaires currently exist. Some commentators speculate it’s as few as 500 whereas others say it could be as many as 1000. Regardless of which is correct it’s very likely we’ll see many more ISA Millionaires in the future… and there’s no reason why you shouldn’t be one of them.
Starting today, investing the complete £20,000 allowance each year and assuming a realistic growth (after charges) of seven per cent each year, it would currently take approximately twenty years for a single investor to become an ISA Millionaire. Likewise, a married couple investing their full £40,000 each year could potentially achieve ISA Millionairedom in a decade. Due to the dynamic nature of the financial markets this isn’t a guarantee that can be written in stone, but one thing is for certain – thanks to the increased value of the ISA allowance, the time needed to accumulate your first million (especially if you’re able to utilise your full ISA limit) has never been shorter.
The key is to invest as much as you can afford, and to begin investing as soon as possible. Many investors make a last-minute dash to put money into their ISA before the end of the tax year so that they don’t lose their annual allowance, but if you make the most of your ISA allowance early in the tax year you’re giving your money an additional twelve months to ‘compound’ and build new investment returns on top of the investment returns you’ve already gained. For many people, placing a lump sum in their ISA at the beginning of the tax year is easier-said-than-done but, by establishing a monthly savings plan, it is possible to start investing early and make regular contributions into the ISA. Not only will this save you the stress of that nail-biting end-of-tax-year sprint, you’ll also be able to take advantage of the compound snowballing effect.
Even if you can’t afford to invest the full £20,000 allowance, ISAs can still go a long way towards helping you achieve your financial goals but there are a lot of options to choose from and the possibilities can seem overwhelming. That’s why it’s important to work with an experienced financial advisor who understands the complexities of the ISA marketplace and has the investment knowledge and expertise to make your goals a reality. At Moyes Investments we will guide you through the ISA jungle and work with you to build and manage a portfolio that could see you joining the ranks of ISA Millionaires quicker than you think. Forget the old adage ‘You’ve got to be in it to win it’, we can help make your future financial security much less of a gamble.
To find out more, contact our friendly team of advisors on 01638 429975 or firstname.lastname@example.org.