Will you be the next Isa millionaire?

Published by Holly Thomas on 25 February 2014.
Last updated on 30 March 2015


Indeed, there are Isa millionaires all over the country – not just in the House of Lords, as mentioned in Jeff Prestridge's column.

The Isa season, refers to last-minute investing in the run-up to the end of the tax year on 5 April when if you haven't used your Isa allowance for the year, it is lost forever.

With investor confidence picking up and interest rates remaining stubbornly low, many experts are expecting a bumper year for stocks and shares Isas.

A return to equities has been gathering pace with this asset class continuing as the best-selling for the eighth successive month. More than £935 million was poured into them in November, according to the most recent figures from the Investment Management Association.

The dedicated investors who have managed to achieve the elusive £1 million Isa have been saving for years but it's not too late to get started. With a tax allowance of £15,000, we explore what you need to know to maximise your Isa.

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Can I really be an Isa millionaire?

Using the current £15,000 Isa allowance as a starting base, assuming the allowance rises 2% each year and the annual capital growth is 5% after charges, a couple could see their Isa pot reach more than £1 million within 20 years, according to investment broker Chelsea Financial Services. With the same assumptions, an individual investing their full Isa allowance could see their investment reach £1 million in just 30 years.

Darius McDermott, managing director of Chelsea Financial Services, says: "Becoming a millionaire can seem an unachievable ambition for many but, as the figures show, it is actually well within the grasp of an individual who starts to invest regularly from age of 30 to 35, or a couple who begin investing from when they're between 40 and 45.

"What this then means is that at age 60 to 65 they could then start to enjoy an additional tax-free boost to their finances of around £50,000 a year, by either taking a 5% income from their investment (from dividends or bonds) or selling part of their investment free from capital gains tax. That's not a bad retirement pot to have."

Why invest in an Isa?

Holding money in an Isa is tax efficient because it avoids paying income tax and capital gains tax. Cash Isas are completely tax-free although stocks and shares (or equity) Isas attract some tax charges.

If you have investments outside an Isa, any share dividends you receive are liable for tax. Dividends from equity income funds suffer a flat rate of 10% tax at source no matter what earnings band you fall into  even within Isas – but there is no further tax to pay.

Building a portfolio

Whether you choose the DIY route to investing or get help from a financial adviser, it's important to know what strategy you want to adopt.

Investors can do well to drip-feed money into their savings plan.

Tom Stevenson, investment director at Fidelity, says: "Regular saving matters for long-term investors. It helps them avoid piling in at the top of the market and bailing out at the bottom. By automating the process of investing, you can take the emotion out of it and end up with a much better outcome. Monthly savings plans are a much better way of investing into an Isa than leaving it all to the last minute and rushing into a decision."

Diversification is key and a stocks and shares Isa can, in fact, be invested in anything from equities to corporate bonds to gold or even wheat futures.

Nick Hungerford, chief executive at Nutmeg, the online investment service, says: "If you're looking to the investment landscape for higher gains, it's important to look at the full breadth of opportunities out there – stocks and shares, bonds and commodities, across all types of industry sectors and countries."

McDermott says: "If you have a long time period in which to invest, you can afford to invest in riskier assets that have the potential to produce higher returns. I'd suggest a portfolio that is 100% in equities to start with. Over time, you can adjust your portfolio. We suggest reviewing investments once or twice a year to make sure you are still on track."

Some tips from our experts:

Small companies

Hannah Edwards, commercial director at BRI Asset Management, tips Aim shares that are now available to hold within the tax-free Isa wrapper. Aim, formerly called the Alternative Investment Market, is a trading platform for small firms that need to raise money from investors but cannot afford, or prefer not to go for a full stockmarket listing.

While smaller companies are notoriously volatile, they can grow faster than bigger firms – and some will soar, offering stellar returns. Edwards says: "Aim shares, already exempt from inheritance tax in most cases, provided they've been held for more than two years, will also be exempt from capital gains tax and income tax if tucked into an Isa. Plus there will be no stamp duty to pay from April."

Edwards tips the Miton UK Smaller Companies fund and GLG Undervalued Assets Trust.

Smaller savers

Not everyone can afford to save the full Isa allowance each and every year. But putting a little something away every month is better than doing nothing.

You might not become a millionaire by saving £50 a month but every little helps. If you invested that sum every month for 25 years, and it grew at an average rate of 5% a year after charges, you would still end up with nearly £30,000. If you could double your monthly investment to £100, then that figure could rise to a much more impressive £60,000.

Many investment funds offer regular investment plans from £25 or £50 a month, without paying for advice, from fund supermarkets such as Alliance Trust, Bestinvest, Cavendish Online, Chelsea Financial Services, Fidelity and Hargreaves Lansdown.

Nutmeg helps you build an investment portfolio with £1,000 to start with and then £50 a month.

Switching cash holdings

Under Isa rules, investors can switch existing Isa savings held in cash Isas over to a stocks and shares Isa.

Over the past year, companies have reported a surge in such transfers as savers become disillusioned with ultra-low interest rates offered by banks.

At one point last year, three times as many investors transferred their cash Isas to stocks and shares Isa compared with the previous year, according to Hargreaves Lansdown. The top funds for cash Isa transfer over the past three months include the HL Multi-Manager Income & Growth Trust, Artemis Income, Marlborough Multi Cap Income and Cazenove UK Smaller Companies.

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