Who wants to be an ISA millionaire?

If the annual ISA allowance stays at £20,000, could investing in a stocks and shares ISA make you a millionaire in 25 years? Read on to find out more.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
ISA millionaire

In the 2016/17 tax year, 11.1 million adults had an ISA account. The overwhelming majority – 77% - of those were cash ISAs, with the balance invested in stocks and  shares ISAs. Everyone should have cash savings, but with cash ISA interest rates still running well below the rate of inflation, should more people be considering a stocks and shares ISA? They come with risks — you could get back less than you put in — but historically, investing in stocks and shares over longer time frames has resulted in strong returns.

Learn more about Top ten ISA tips for 2018

How your investment pot would have grown since 1999

Investors who have taken advantage of the full ISA allowance each year, and consistently operated a simple but disciplined approach to investing could have seen their investment pot grow from £7000 (the annual allowance in 1999) to over £350,000 today. These returns assume the annual allowance was invested in a cheap, global equity tracker. For our calculations, we have used the MSCI World Total Return Index which goes back this far. Investors have the choice of many global indices trackers but the iShares Core MSCI World ETF (SWDA) offers developed and emerging equity exposure for an annual fee of just 0.20%.

The chart above shows both the power of pound cost averaging and compounding

By continuing the investment approach described above, we estimate that this type of investor could feasibly become an ISA millionaire within the next 13 years, if equities continue to average a 5% annual return, and the current £20,000 ISA allowance remains and is fully utilised by the investor each year.

But what if you’ve never used a stocks and shares ISA before?

If you are someone who has not paid into a stocks and shares ISA before then you’ll be in one of two camps. The majority will not have used an ISA of any type before at all. This is likely to be down to the fact that a large number of UK workers simply find it difficult to save on a regular basis. Others will have had one or more cash ISAs but not a stocks and shares ISA. Either because they’re worried about the risks, think it’s expensive, or they just haven’t considered one.

If you have been saving into a cash ISA, you’re unhappy with the current interest rate and you are saving for the long term, you can transfer the balance into a stocks and shares ISA. All you’ll need to do is fill out a transfer form that your new provider will give to you, and they’ll do the rest.

The chart below shows when you could expect to become an ISA millionaire if you’ve not used your ISA allowance before, based on different expected rates of return.

At a 5% rate of return, a 35-year-old who starts investing now, and maximises their allowance each year is predicted to have a £1 million ISA pot before their 60th birthday. While at a more conservative rate of 3% per year, the landmark figure would be reached before their 65th birthday.

One hand giveth, the other taketh away

Utilising your ISA allowance has become increasingly attractive for investors over the last decade, with the government gradually reducing the ceiling for pensions from £1.8 million to £1 million. To offset this, they have simultaneously increased the ISA allowance to £20,000 in a deliberate ploy to collect income tax receipts upfront, instead of waiting until the taxpayer draws down their pension.

If you believe you are likely to accumulate a pension greater than the current ceiling, it would be wise to start using your ISA allowance now. It is likely your pension is invested in a mix of stocks, bonds and alternative investments such as precious metals, so why not use your ISA allowance the same way?

You can choose to invest in an ISA account where you can make your own investment decisions, or you can choose a ready-made portfolio that will be managed on your behalf, and specifically tailored to your goals and risk profile.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.