Could you become an ISA millionaire?
Posted onSince their introduction in 1999, ISAs have become a popular option for savings and investing, offering several key benefits.
For instance, you do not pay Income Tax, Capital Gains Tax (CGT) or Dividend Tax on interest or investment gains from funds in an ISA. As such, they can help you build a tax-efficient nest egg.
An ISA can also offer great flexibility as there are different types that are suited to various financial aims. For example, you may use an easy access Cash ISA to build an emergency fund or a Stocks and Shares ISA to invest and build wealth for specific goals.
Consequently, ISAs are incredibly popular. Indeed, according to the UK government, 11.8 million adults used an ISA in the 2021/2022 tax year, paying in a total of £66.9 billion.
While the average value of an ISA for over-65s was £58,787, there are many people who have accumulated far more than this.
The number of ISA millionaires has risen sharply in recent years
Accumulating more than £1 million in your ISA may seem like an unattainable goal but it could be more achievable than you think.
Indeed, MoneyAge reports that the number of ISA millionaires in the UK hit an all-time high of 4,070 in April 2021. This is a significant increase on the previous record of 2,000 in 2019.
As such, you may be more likely to become an ISA millionaire than ever before. That said, this is only achievable if you take the right approach to your savings and investments and make efficient use of your ISA.
Read on to learn five ways to increase your chances of becoming an ISA millionaire.
1. Invest in a Stocks and Shares ISA
There are several types of ISA available, but the two you are most likely to use are a Cash ISA and a Stocks and Shares ISA.
A Cash ISA works in much the same way as a savings account, generating interest on the funds you deposit. Conversely, a Stocks and Shares ISA allows you to invest in the stock market and generate returns.
If you hope to become an ISA millionaire, you may have more success with a Stocks and Shares ISA because they offer the potential for higher returns.
According to IG, for example, the total return – including reinvested dividends – from the FTSE 100 between 1984 and 2022 was 7.48% annually.
In comparison, the top five-year fixed-rate ISA interest rate, as reported by Money Saving Expert on 23 August 2023, was 5.26%.
Naturally, past performance does not guarantee future returns and the stock market is prone to fluctuations. That said, historical data suggests that a Stocks and Shares ISA could well offer the necessary growth to become an ISA millionaire.
Funds in a Cash ISA, on the other hand, may not grow fast enough to help you reach the £1 million milestone.
2. Use your full ISA allowance each year
If you can afford to, you may want to contribute the maximum amount to your ISA. In the 2022/2023 tax year, you can pay in a total of £20,000 across all your different ISAs.
By maximising your contributions and using the full allowance every year, you can build your funds faster. Additionally, you expose more of your wealth to potential growth, and you may be more likely to accumulate over £1 million as a result.
According to figures from MoneyAge, you could theoretically become an ISA millionaire in 22 years provided you invest the full current allowance of £20,000 each year into a Stocks and Shares ISA and see 7% annual returns.
Further to this, the ISA allowance could well increase in the future. This may reduce the 22-year timescale, provided you continue to use your entire ISA allowance each year.
3. Invest early in the tax year
As well as contributing the maximum amount, it may also be useful to consider what time of year you invest in your ISA.
A study reported by This is Money examined the difference between paying £3,000 into a Stocks and Shares ISA at the beginning of the tax year and the end, each year since 1999.
It found that paying in at the beginning of the tax year would leave you £9,271 better off.
This is likely because investing in a Stocks and Shares ISA as early as possible in the tax year exposes your wealth to potential growth for longer. As a result, you may see a higher return on your investment.
Starting early also means you can spread out your contributions throughout the year, rather than paying in a lump sum at the end, potentially making it easier to use your full allowance.
4. Stay calm when markets are volatile
The investments in a Stocks and Shares ISA may fluctuate in value due to global events like the 2008 financial crisis or the Covid pandemic.
If you can remain calm during these periods of market volatility, you may be more likely to become an ISA millionaire.
However, if you panic and sell your investments when the market fluctuates, you may miss out on opportunities to grow your wealth in the future as and when the markets bounce back.
Research reported by CNBC supports this as it shows that the biggest stock market dips are normally followed by the most significant gains. So, if you sell when the markets dip, you lock in the losses and miss out on potential growth as and when they recover.
That’s why, typically, “time in the market” is more effective than “timing the market” meaning that it may be better to remain patient and hold investments regardless of market fluctuations.
5. Reinvest your dividends
Albert Einstein once described compound growth as the “eighth wonder of the world” and it can certainly boost your chances of becoming an ISA millionaire.
If you reinvest any dividends you get from your Stocks and Shares ISA, you benefit from compounding – growth on the growth you have already made from your investments.
Figures from Barclays demonstrate the power of compounding. They calculated that if you invested £10,000 with 2% growth each year, you would have £12,000 in 10 years, assuming that you withdrew the gains.
However, if you were to reinvest that 2% growth each year, your investment would be worth £12,190 after 10 years.
These additional returns could help you achieve your goal of becoming an ISA millionaire much faster.
Get in touch
We can help you find the most suitable way to grow your wealth and make the most of savings and investment vehicles like ISAs.
Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.
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