Individual Savings Accounts (ISA) are underrated tax-efficient vehicles that have the potential for you to reach millionaire status. How?
1. Start early
With the junior ISA allowances now at £9,000 and if we assume parents start utilising this allowance for their child from birth annually until age 18 and then utilise the £20,000 annual allowance, the child could reach the £1 million* status at age 33. This is based on an annual investment return of 5%.
For those who are not as lucky, an adult could achieve the same position if they fully fund their ISA allowance from age 30 for the next 25 years up to age 55 – they could become an ISA millionaire.* This becomes even more powerful if you consider a couple being able to achieve this in terms of their retirement planning with their ISAs sitting alongside their pension provisions.
2. Stocks & shares ISA vs cash ISA
If you were to invest in a cash ISA at a rate of 0.5%, assuming the rate did not change, then it would take the same 30-year-old, 43 years (until age 73) to build their ISA to £1 million. After more than a decade of low interest rates in the UK, it may be unlikely that this position is going to change in the short term. However, when you factor in inflation over the same period, you are unlikely to have the same purchasing power as you would expect for a millionaire fund value.
Alternatively, by considering the stocks & shares ISA option as a long-term investment strategy, the risk tolerance required would be lower than investing over a shorter period of time. While capital value can fluctuate over the 25-year period, it could give the investor sufficient time to meet their financial goal. If you were able to take a higher level of risk with a view to generating a 7% per annum return, the 30-year-old could have £1 million at age 51.
3. Active management
Whether you decided to utilise your ISA allowance at the start of the tax year or consider a phased approach, I believe active management to be key. Having a discretionary fund management platform allows your funds to be actively invested with key asset allocation decisions being made behind the scenes based on your risk profile, not only at the start of the strategy but continually throughout with regular reviews with yourself.
If you are looking to implement the above type of strategy, please feel free to contact me and we can then work together to rise to the challenge of you becoming an ISA millionaire!
Contact your Mattioli Woods consultant.
* This is based on an annual net investment return of 5% and assumes that future JISA and ISA allowances permit
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.