An ISA millionaire is someone who has a Stocks and Shares ISA with a value in excess of £1m. ISAs were introduced in 1999, replacing a similar product known as a personal equity plan. At the moment, I can invest up to £20,000 a year into my ISA to benefit from zero capital gains tax on the stocks held (and sold) within it. With this in mind, how can I maximise my potential to reach the seven figure mark?
Targeting income or growth
The first way I can look at getting to ISA millionaire status is via an income accumulation approach. It sounds complicated, but isn’t really. This involves buying dividend shares for most of my portfolio each year.Â
Dividend shares pay out income to shareholders usually a couple of times a year, based on the profitability of the previous trading period. If I can invest in enough of these companies, I should be able to receive a stream of income in my ISA. In order to put my money to work in the best way possible, I wouldn’t leave this income idle in my account. Rather, I’d reinvest the dividends back into more dividend paying stocks.
For example, if I invested £20,000 annually into dividend stocks with an average yield of 5%, I could become an ISA millionaire by year 25 — as long as my investments don’t disappoint.
If I wanted to try and speed up the timings involved, I could look to switch to investing purely into high-growth stocks. The share price appreciation with these types of companies could allow my pot to grow at an average rate of 8% a year. However, there is a downside risk here to compensate for the higher return. I’d be taking on higher risk as many such growth companies are younger and so have a less proven track record. If I stick to the larger companies that are already in the FTSE 250 or FTSE 100, I should be able to reduce my risk somewhat.
In this case, investing my ISA amount annually at a rate of 8% could get me to ISA millionaire status by year 20.
ISA millionaire status via monthly investing
The above ways of trying to get me to a million assume that I can afford to invest the maximum amount allows of £20,000 a year. But what if I don’t have this ability?Â
Instead, I could set up a monthly investment amount of £1,000. I can choose how to invest this in terms of the stocks I like at the time. The benefit here is that over the course of each year, different opportunities will come up. For example, last March would have been a great time to top up my ISA portfolio by £1,000 during the stock market crash.Â
The downside here is that it will take me several years longer to become an ISA millionaire. However, I might feel it could be worth it given the lower monthly commitment amount.