How you can become an Isa millionaire – and how fast

How to become an Isa millionaire
How to become an Isa millionaire

At the last count, there were over 4,000 Isa millionaires in Britain and the top 50 have pots averaging a whopping £8.5m.

But becoming one does not just happen overnight – it takes time and patience.

An Isa is an all-important tax shelter for your savings where you will escape tax on dividends, capital gains tax on any profits when you sell, as well as income tax.

The level of contributions, as well as the investments you decide to place inside an Isa and how they perform, are the main drivers that will determine whether you can one day reach the £1m savings milestone.

Here, Telegraph Money explains how you can do it.

Work out the returns you must achieve 

To get to a million pounds, investors will need to max out their Isa each year and for investments to provide a certain level of returns.

Someone who put the full allowance in their Isa each year since their launch in 1999 and who earned a steady 5pc return a year would have built up a pot of just over £484,000 – not even halfway to reaching the £1m mark.

To reach £1m an investor would have needed to have invested the full Isa allowance each year and to have earned 11pc each year since.

If you include going all the way back to Peps – the precursor to Isas – you would have needed annual returns of 6.5pc.

Investing over the long term has paid off for many who started when Peps were introduced in 1986. The age of customers who have grown their Isa pots to £1m plus is around 73, according to data from stock brokers.

At brokers AJ Bell, the youngest Isa millionaire is just 35.

The investments millionaires have used

Listed investment funds have powered Isa millionaire portfolios at Interactive Investor, and account for the largest share of Isa portfolios: 42.5pc compared to just 8.2pc for unlisted funds.

Alliance Trust and Scottish Mortgage are two of the most common investment trust stocks found in the average Isa millionaire top 10 holdings.

Investment trusts, the oldest form of collective investment in the UK, have several advantages over unlisted funds, according to advocates. One of these is their ability to hold back some of the income they receive from their underlying investments in good years to pay out to investors when times are tougher.

They can borrow money to invest extra than that provided by their investors to boost performance in an upturn. Many also have great track records for paying dividends. The downside is they can be expensive to trade, with many brokers charging flat fees for the purchase of shares, while units in unlisted funds can be purchased for a negligible fee.

Many investors have had success from unlisted funds, however. Popular funds among Isa millionaires include Rathbone Global Opportunities, Lindsell Train Global Equity, Fundsmith Equity and Fidelity Special Situations. They have also cashed in on rising share prices and dividends from individual stocks.

FTSE blue chips are widely held in Isa millionaire accounts. They include Shell and BP; Lloyds Banking Group and Aviva; Diageo and Rio Tinto.

There are no passive funds in the top 10 at brokers Interactive Investor. These funds use computer algorithms to automatically track an index such as the FTSE 100. A common thread here is being – almost – fully invested.

“Isa millionaires only have an average of 5pc cash in their portfolios compared to 10pc across all Isa accounts, so they are putting more of their money to work,” says Dzmitry Lipski, head of funds research at Interactive Investor. “Long term this can help avoid cash drag,” he adds.

The fastest way to get to £1m

To get to £1m as quickly as possible, the first step is to invest the maximum each year.

It is arguably easier to become an Isa millionaire today, with a £20,000 a year allowance for savers (assuming you can afford to put away the maximum), compared to older investors who started out when Isas launched in 1999 with a £7,000 limit.

If you started saving today and the Isa limit remained at £20,000, it would take you 25 years to become an Isa millionaire, assuming an average annual return of 5pc.

The next key part of your strategy could be to invest early in the tax year. It means you will have up to an additional year in the market, which will also help power portfolios in a rising market, as more of your assets are invested for longer.

When it comes to selecting investments you’ll need a diverse, balanced mix according to your risk appetite. However, you may wish to consider listed funds which have been a good bet for many over the years.

A total of 28 investment companies would have made investors more than £1m if they had invested the full annual Isa allowance in the same company each year, according to research from the Association of Investment Companies, a trade body.

Investing the full Isa allowance each year from 1999 to 2023 – a total of £286,560 – and reinvesting the dividends into one of the five investment companies below would have generated a tax-free pot of over £1.4 million at the end of February.

These top five performing funds are: HgCapital, Pacific Horizon, Scottish Mortgage, Allianz Technology and abrdn Asia Focus. Among the common investment themes in these listed funds are technology and smaller companies.

While these figures are compelling, it is not advised to have all your money in one investment or one investment type.
The average Isa millionaire portfolio includes 28 holdings, according to AJ Bell.

Laura Suter, head of personal finance at the firm, says: “Focus on steady climbers that will gradually increase your wealth over time, rather than putting all your money in higher risk investments that could drop significantly, or at least give you a much more hair-raising ride on the way.

“Make sure you’re sticking to a risk level you’re comfortable with and that your portfolio is well diversified. Betting on a few stocks rising in value could be a recipe for disaster if the sector nosedives or the company hits some trouble.

“Lots of those who make it to millionaire status will invest directly in stocks, rather than entirely in funds. But you should only take this route if you know that you have the time and inclination to research and monitor the stocks regularly.”
Experts insist that getting rich slowly is a smart strategy.

Sarah Coles, head of personal finance at Hargreaves Lansdown, says: “Isa investors don’t take enormous risks.
“Their focus is to consistently invest as much as possible of their annual allowance, as early as possible in the tax year, in a diverse and balanced portfolio. And they’ve done this every year for decades.”

Telegraph Money’s top 25 funds list includes some of this newspaper’s favourite investments, whether investing in British firms, globally, for income or for growth.

Why long-term investing works

Investing over a long period is a tried and tested strategy.

The sooner you start saving the more you can put aside, and early contributions are the most valuable because they have the longest to grow.

Compounding will also boost returns. In simple terms, your money earns a return in the first year and both the original cash and the return benefit from any growth in the second year. In the third year your investment is further enhanced by any returns achieved. This snowball effect is known as compounding.

This article was first published on March 28 2023, and is kept updated with the latest information.

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