Living proof that you can be an Isa millionaire
Are you a fan of the individual savings account, the tax-friendly wrapper that allows you to save £11,520 in the current tax year without troubling the tax-guzzling machine that is HM Revenue & Customs? Or don't you think saving into an Isa is worth it because of low savings rates and volatile investment returns?
Well, for those of you who doubt the merits of Isas – and there are many doubters out there – let me tell you what this savings vehicle has done to one individual. It's made him an Isa millionaire - in fact it's made him an Isa millionaire a few times over.
I doubt he's unique – there are probably other Isa millionaires out there in the stratosphere (do please email me if you are one of them, if only so I can congratulate you). But he's the first, or one of the first, to come out of the closet.
Crucially, he's living proof that if you are prepared to invest on a regular basis, do some serious research and be patient, an Isa can quite literally change your financial life, empowering you in retirement and beyond.
John Lee is the Isa millionaire in question - a name that might not ring bells with many of you. But for those who like their politics, John Lee is the individual who once served under Margaret Thatcher as a Conservative minister. Then, 12 years ago, he controversially defected to the Liberal Democrats before being made Lord Lee of Trafford in 2006.
These days, he spends most of his time in the Lords talking about matters of defence and tourism (his political loves). But investing is in his blood. Until a few years ago, he made it his duty to invest the full permitted annual allowance into personal equity plans and now Isas. It's this devotion to investment duty that has reaped him rich rewards.
John Lee is an investment enthusiast - indeed, he's so fervent about the value of long-term saving that he's just written a book about his investment exploits. It's called How to Make a Million - Slowly, and for anyone who is semi-passionate about creating long-term wealth it's a must read.
I recently met John over lunch at the House of Lords. Such is his love of investing (and maybe desire for a little publicity) that he was prepared to see me 24 hours before going into hospital for a major operation. And such is his fame in Lords circles for his investment prowess that our lunch was interrupted by a stream of barons and baronesses complimenting him on his investment achievements. He's the Warren Buffett of the House of Lords.
Keys to success
What are the keys to his success? Well, for a start, he takes investing deadly seriously, doing thorough research on the companies he intends purchasing shares in. In fact, whenever possible, he likes meeting the management of the companies he invests in so he can hear for himself what their business plans are.
His ideal business is one that generates a combination of cash and profits and where there is a commitment to paying shareholders a regular (and growing) dividend. He also likes management to have ‘skin in the game' (be shareholders) so that the financial interests of management and shareholders are aligned. It's why he is a fan of family-controlled businesses.
Among his pet hates are investment funds, vehicles I love.
But given he is an Isa millionaire and I am borderline financially impoverished, who am I to argue with him on his preference for shares over funds?
He also dislikes biotech companies, as well as mining and exploration stocks, on the basis they are too risky. Crucially, he reinvests all his dividends, buying more shares in the process.
Of course, most of us - me included – don't have sufficient ‘free' income to utilise fully our generous annual Isa allowance. But Lord Lee is living proof that you can build long-term wealth from investing in Isas.
So use your Isa allowance before the tax year is out. And set yourself on the path to becoming an Isa millionaire.
Jeff Prestridge is the personal finance editor of the Mail on Sunday. Email him at firstname.lastname@example.org
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.