There are apparently over 1,000 ISA millionaires in the UK, investors who have made more than £1m via a tax-free ISA wrapper.
Unfortunately, there’s no shortcut to making a million in the market. The fact that you’re only allowed to deposit a certain amount of money into an ISA every year, only makes the challenge harder.
That said, in theory it’s quite straightforward to become an ISA millionaire, but you need to follow a few simple rules if you want to get there.
Disciplined approach
ISAs are particularly attractive as savings instruments because, unlike other tax efficient wrappers, they’re quite flexible.
While you can only deposit a maximum of £20,000 a year into a Stocks & Shares ISA, it doesn’t have an age limit or earnings limit. What’s more, so-called ‘flexible ISAs’ allow you to withdraw and deposit as much money as you want during the tax year as long as the total amount contributed doesn’t exceed £20,000.
The flexibility of ISAs is helpful to investors because if you want to make a million, you’re going to need to start saving as soon as possible. Indeed, I calculate it will take 50 years to build a £1m ISA pot if you max out your savings allowance every year.
Investment growth
The good news is, for most people it won’t take this long to make a million. In the example above, I’ve assumed that the money isn’t invested and lies in an account without earning interest, which is unlikely.
The best interest rate on offer on the market for a cash ISA today is 1.5%. At this rate of return, I calculate it will take 38 years to build a £1m ISA pot, assuming you max out your allowance every year. If you’re happy to invest your money, then I reckon you could meet this target even faster.
Over the past two decades, the UK’s leading stock index, the FTSE 100, has produced an average annualised return for investors of around 8%. Using this as the benchmark growth rate, I calculate it will take a saver depositing £20,000 a year just 21 years to build an ISA pot worth £1m.
If you can’t afford £20,000 a year, you can still make a million, although it will take you a bit longer. According to my calculations, a deposit of just £300 a month, invested in a low-cost FTSE 100 tracker fund, could grow to be worth £1m over the space of four decades.
Slow and steady
In the examples above, I’ve tried to show how easy it is to make a million in the market. However, most investors stumble because they try and chase returns, and take on more risk than they should do, which can lead to repairable losses and years of lost savings. It’s vital to make sure that you don’t make this mistake on your road to a million.