For those who want to become a millionaire, there is another way to boost your chances, rather than accepting the long odds (1 in 14 million) offered by the National Lottery.
By taking full advantage of tax-efficient Isas each year, investors can become millionaires in 23 years, according to calculations by wealth manager Brewin Dolphin. Moneywise columnist Jeff Prestridge has also written a piece about how this dream can be fulfilled.
The length of time needed to achieve the feat has shortened, thanks to the Isa allowance becoming more generous. This year up to £15,240 can be sheltered in Isas. This figure is set to rise to £20,000 from next April. This is much higher than when Isas were introduced in 1999, when the allowance stood at £7,000.
The calculations by Brewin Dolphin assume that an investor who starts investing in Isas today puts in the full allowance each year, and generates a 5% return each year from their investments. This 5% figure is not unrealistic. Data from the Barclays Equity Gilt Study shows that British shares have over the past 116 years typically returned 5% annually.
Under this scenario, a stocks and shares Isa would grow to £1,012,307 by 2039, Brewin Dolphin calculated. Of this total, £451,087 would be investment profit, on overall contributions of £561,220.
There are some caveats, however, the first one being that the projection does not take into account inflation, which has the effect of reducing the real value of your investment.
It is also worth pointing that realistically only a very small percentage of investors will be able to make full use of their allowance each year.
But, even though the goal of becoming a millionaire will continue to be a pipe dream for most, the calculations by Brewin Dolphin do highlight the power of compounding interest and how investing for the long term increases investors’ odds of success.
Ammo Kambo, divisional director and chartered financial planner at Brewin Dolphin, says: “The compounding effect of regular investing over the long term using Isa allowances should not be underestimated.
“As well as the potential to accumulate life-changing sums, crucially this wealth is sheltered from income and capital gains taxes.”
This story was originally written for our sister website Money Observer.