How to become an Isa millionaire: Embrace consistent saving and the wonders of compounding to make a million without clever stock picking
It sounds like an unachievable dream, but people with more than £1m within their Isa are not quite as rare as you might think. Last March, Barclays Stockbrokers revealed that 67 of its clients had already achieved that financial milestone, while Telegraph research put the total number in the UK at around 200.
Although Isas have only been around since 1999, replacing the PEP, and the annual allowance only rose to £15,000 in July 2014, a combination of compound growth, consistently maximising contributions, wise investment decisions (and some lucky punts on particular stocks) has allowed this fortunate few to achieve the remarkable feat of shielding over £1m from the taxman.
So how can you become an Isa millionaire yourself without being a superior stock picker?
Maximise contributions
Calculations from Fidelity International suggest that it could take you just 27 years and nine months to gain Isa millionaire status. But you’ll need to save hard to do so. This estimate assumes that you save the full £15,240 this tax year, subsequently invest the full Isa allowance annually at the start of each tax year, that the annual allowance rises by 2 per cent every year, and that you achieve an annual growth rate of 5 per cent.
If you’re a couple and make full use of both of your allowances, you’ll get there even sooner. Towry research has found that you can become an Isa millionaire couple within 20 years if both of you make the maximum annual contribution.
Embrace compounding
But don’t put off the saving till another day, or you’ll lose out on what Albert Einstein called the eighth wonder of the world: compounding.
The impact can be substantial. “If a saver had diligently contributed the maximum each year into Isas (and its predecessor the PEP) since 1987, they could have squirrelled away £245,520,” says Sarah Lord of Killik & Co. “Assuming a 5 per cent rate of return, this could now be worth as much as £512,000.” Even small amounts can grow substantially over time. If you had invested £10,000 at 5 per cent per annum 20 years ago, it would now be worth just over £26,500.
Don’t park it in cash
According to BlackRock’s latest Investor Pulse survey, savers over-allocate to cash – and they know it. The average investor has 40.94 per cent of their investable assets in cash deposits and savings accounts and, while some level of cash saving is of course important, having such a strong weighting to an asset class that returns so little after inflation is not going to deliver the returns you need to become an Isa millionaire.
Fidelity calculations show that, if you had invested £15,000 into the FTSE 250 index over the 10 year period between 31 January 2006 and 31 January 2016, you would now be left with £35,455.49. That same amount invested over the same time frame in the average British savings account would be worth just £16,076.25 – a difference of £19,379.24.
Keep an eye on costs
From platform fees and trading commissions, to charges for moving Isa provider and performance fees for wealth managers, costs can have a significant impact on returns.
And sometimes more expensive actively managed funds do not deliver what they promise. Tilney Bestinvest’s most recent Spot the Dog report found that £18bn was sitting in 54 seriously underachieving investment funds (defined as having failed to beat their benchmark over three consecutive 12 month periods and by 10 per cent or more over three years).
Alternatives like tracker funds and ETFs have increased in popularity in recent years, partly in response to demand for lower fees and greater transparency. “ETFs are low cost, they’re amazing building blocks of portfolios and they’re also transparent,” says Ian Peacock of IG.
But while “people are quite rightly asking ‘what is it costing me to generate the returns I need’,” says Tony Stenning of BlackRock, a sole focus on costs may not be sufficient to reach your desired outcomes. If you want consistent annual returns over the medium term of 4 per cent above inflation, for example, a portfolio designed to reach that goal might cost more but it might also be more likely to actually deliver what you want.
Check your behaviour
What investment behaviour can maximise your chances of becoming an Isa millionaire? “Diversification,” says IG’s Peacock, adding that investment platforms are rolling out low-cost model portfolio services that will attempt to optimise your portfolio to your risk appetite and investment aims, and rebalance them based on market movements.
But just as important is patience and consistency. Research by Fidelity has shown that consistent, regular contributions tend to deliver much higher long-term returns than trying to time the market or over-reacting to market volatility.
An individual who had regularly invested £1,000 a year in the FTSE All Share from 1986, bumping up his or her annual contribution by £1,000 each decade until January 2016, would have seen an original investment of £82,000 grow to £233,800.
By contrast, even someone who had achieved the near-impossible feat of successfully timing the market over the same period would have been left with £45,000 less than a “Steady Eddie” regular contributor. This shows that “time in the market is better than timing the market,” says Tom Stevenson of Fidelity.