While they have since become an integral way to save, they were not welcomed when first introduced with one Labour MP branding them a ‘colossal failure’ just months after they launched[1].
Despite the initial negative outlook, ISAs have become an important part of many peoples’ financial strategy, with almost £750 billion currently held in ISAs by UK adults and a further £9 billion in Junior ISAs for children[2].
You might think becoming an ISA millionaire is out of reach but do not discount the idea just yet. There are already over 4,000 ISA millionaires[3] in the UK, taking an average of 22 years to get there.
Achieving millionaire status through ISAs is not a mere fantasy; it is a feasible goal with the right strategy and discipline. So, how did they do it? Starting early is important, as is being consistent with your contributions. Read on to discover the secrets of ISA millionaires.
Our simple guide to becoming an ISA millionaire.
Start early
This may sound obvious, but time is your greatest ally, the sooner you start, the more you benefit from compound growth which is the process of earning returns on both your initial investment and prior year returns. Even modest, regular contributions can grow significantly over time.
Take advantage of compounding
Reinvesting your dividends and interest earnings will take full advantage of compound growth. Compounding can exponentially increase your investment over time, as you earn returns on your original contributions and the accumulated earnings. The longer your money remains invested, the more powerful the compounding effect becomes. For instance:
• If you start investing £10,000 annually at an average annual net return of 5%, it will take approximately 35 years to reach the £1 million mark.
• If you can afford to invest the full £20,000 each year, the road to £1 million becomes much shorter. Assuming the same 5% average annual net return, maxing out your allowance could see you hitting the million-pound milestone in around 25 years.
Of course, if you have a spouse or partner and you each do this, you could achieve combined ISA pots of £1 million in around 16 years.
Maximise your annual allowance
For the 2024/25 tax year, the ISA allowance is £20,000 per person. Consistently maxing out this allowance is crucial. History shows that investing in shares, bonds and other assets is one of the best ways to build wealth over the long term, although past performance is not a reliable indicator of future results.
Choose the right type of ISA and spread your risk
There are different types of ISAs, but for most long-term investors, Stocks and Shares ISAs are likely to be the preferred option, typically providing higher returns compared to Cash ISAs, albeit with higher risk.
The investment mantra of not putting all your eggs in one basket is also true of ISAs. A straightforward way to mitigate risk through diversification is by placing your money into a portfolio comprised of a range of investments managed by an investment professional. The hard work is done for you, with the mix of investments adapted to the evolving environment. Investing in a diversified portfolio of stocks, bonds, and other assets can optimise growth while managing risk.
Be consistent and patient
Becoming an ISA millionaire does not happen overnight. It requires consistent contributions and a patient, disciplined approach. Setting up regular contributions can be extremely beneficial, reducing the temptation to spend rather than save.
With stocks and shares ISAs, capital is at risk and there is the potential for the value of your investments to fall as well as rise. Therefore, it is important when investing to only invest money that you are confident you do not need in the short to medium term, thus allowing you to ride out periods of short to medium term volatility. It is also important not to take too much risk where you feel uncomfortable.
Monitor and adjust
Regularly monitor your investments and adjust your strategy as needed. Life changes, and financial goals may necessitate tweaks to your investment approach. Staying informed and proactive helps keep you on track towards your millionaire goal. Sticking to your investment plan even during market downturns can prove to be an astute move; over time, the market tends to recover and grow, rewarding patient investors.
This is where ongoing advice from investment professionals can support your goals. Placing this responsibility in the hands of a professional can also provide peace of mind.
Conclusion
Becoming an ISA millionaire is achievable with early and consistent investing, maximising your annual allowance, choosing the right investment vehicles, and leveraging the power of compound growth.
A disciplined, long-term approach and wise investment choices can help you turn your ISA into a substantial nest egg and reach that coveted seven-figure mark.
To start this journey, or to continue your progress to date, speak to your Mattioli Woods consultant and take the next steps to becoming an ISA millionaire.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise. Past performance is not a guide to future returns. Inflation is excluded from assumptions made and can erode purchasing power. Eligibility and ISA rules apply. Tax treatment depends on an individual’s circumstances and can change. The content of this email is for information only and does not constitute advice.
[1] A brief history of Isas in facts and figures (thetimes.com)
[3] https://www.independent.co.uk/news/uk/home-news/isa-millionaires-uk-business-b2385379.html
Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.
