Are you on track to be an ISA millionaire?

Official figures show that the number of UK millionaires has risen sharply in recent years. It is theoretically possible to become a millionaire within 18 years – but how realistic is this?

Recent figures from the Office for National Statistics (ONS) show that close to 3.6 million UK households had £1m or more in total wealth by the end of June 2016. This represents an incredible 29% increase in two years. Using regular savings and investments into an ISA wrapper, how long would it take to actually become a part of this burgeoning demographic?

The government elected to leave the ISA allowance unchanged this year but the £20,000 limit remains a generous one. Partners can combine allowances to shelter up to £40,000 a year from tax and grow their investments efficiently and effectively. In fact, two people working together like this could end up becoming ISA millionaires in a little more than 18 years.

A couple who puts away the maximum of £40,000 every year, with an assumed annual growth rate of 4%, could see their ISA pot grow to £1,066,849 in 18 years. An individual who invests their full ISA allowance every year could see their investment pass the £1m mark within 28 years, under the same conditions.

Making it to £1m is by no means an easy achievement but it can be made more so with careful planning and regular investments. For those who do not utilise the full allowance in a year, it can be a good idea to use a ‘bed and ISA’ strategy in order to bring unwrapped investments into an ISA. With a ‘bed and ISA’ strategy, investments held outside an ISA are sold and then bought back within the ISA, allowing them to grow tax-free. The capital gains tax allowance just went up from £11,300 to £11,700, making it easier than ever to move investments into an ISA.

The main thing is to invest as much of the allowance each year as is affordable but investors will also want to consider how this is done in order to maximise the benefits over a longer timeframe. One of the most effective strategies on this front is to make regular payments into an ISA as opposed to lump sums. This is known as pound cost averaging and can be effective in helping counter the volatility of the stock market. By investing a given amount monthly in equally-sized chunks, rather than a larger lump sum in one go, an investor ends up buying more shares or units when prices become cheaper and fewer when they become more expensive.

This systematic approach also helps investors conquer bad habits such as only buying shares when the market is buoyant; though there are still risks and with all investments, it is possible to get back less than was originally put in, especially over timescales of less than five years.

It is also important to keep track of the income that is generated by an ISA pot and make the most efficient use of it. In the event that investments pay out dividends, investors will want to consider reinvesting them. There is a reason that Einstein is believed to have described compound interest as “the eighth wonder of the world” and reinvesting income can be a major factor in securing long-term returns.

The earlier regular payments into an ISA can be started, the better. But it is vital to remember that this is a long-term game and that a successful investment strategy involves a combination of patience and due diligence. Investors will need a clear idea of what their long term strategy is, and must be prepared to properly research the investments they are prepared to make. When it comes to stock picking, this may involve focusing on consistently profitable companies, with underlying businesses that are comprehensible. When it comes to fund picking, this will involve comparing different products and fees to ensure value for money and long term growth potential. Risk will always be a deciding factor and a successful investor never takes on more risk than they are prepared for.

Nothing guarantees that £1m ISA pot but the right preparations and observations can improve the odds considerably.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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