According to HMRC, there are currently 2,000 ISA millionaires in the UK. And InvestingReviews reports that 60 ‘ISA multi-millionaires’ have ISAs worth an average of £6.2 million. Most of these millionaires have invested regular amounts in stocks and shares ISAs over a 30 year period.
I’m going to look at the typical ISA millionaire in more detail to see what we can learn from their investing habits. A million-pound portfolio may seem out of reach to many investors, but taking small steps now can make a big difference over the long term.
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The rise of the ISA millionaire
So, how long did it take for the first ISA investor to hit £1 million? It’s hard to say exactly. Hargreaves Lansdown, one of our top-rated stocks and shares ISA providers, reported three ISA millionaires in 2012, later rising to 161 in 2019 and 579 in 2021.
And there were 33 ISA millionaires across four major ISA providers in 2012, according to the Financial Times. That’s 25 years after the PEP (the pre-cursor to the ISA) was first launched.
What do we know about the average ISA millionaire? The Financial Times reports they have an average age of 70, use their full ISA allowance and invest in growth companies such as technology firms. So let’s take a closer look at how they hit their million.
Habits of ISA millionaires
1. Harnessing the power of compound returns
If you’d invested your maximum allowance in a share-based ISA (or PEP) since 1987, you’d have built up a fund of £334,000. Pretty impressive, but still only a third of the way to the magic million.
The key is the power of compound returns. Our investment calculator shows the potential future value of investments using different returns. And according to my calculations, an average annual return of just over 6.7% would have turned those investments into £1 million today.
But how realistic is a 6.7% return? Well, fairly realistic given IG reports an average total return of 7.8% for the FTSE 100 over the last 35 years. Although a simple FTSE tracker could have done the trick, what were the millionaires’ investment strategies?
2. Picking the right investments
Our Foolish philosophy is to buy and hold quality stocks for a long period of time. Having a long-term investment horizon means you can average out the ups and downs in the stock market.
One Hargreaves Lansdown ISA millionaire advised, “You should buy something that, if you had to put it away in a box for 10 years and forget about it, you would be happy to hold it for those 10 years.”
Here are some of the most popular investments made by ISA millionaires on the Interactive Investor, Hargreaves Lansdown and AJ Bell platforms, according to the Financial Times.
- Trusts: mainly tech-heavy, including Scottish Mortgage Investment Trust, Monks Investment Trust and Edinburgh Worldwide.
- Funds: growth-focused, including Fundsmith and Blue Whale.
- Companies: value-focused, such as Easyjet, Royal Dutch Shell and Lloyds.
3. Sheltering gains and income from tax
ISA millionaires are attracted to the tax-free advantages of stocks and shares ISAs:
- Gains are free from capital gains tax. For higher-rate taxpayers, capital gains tax is 20% (subject to allowances). This could represent a substantial potential tax saving on the £666,000 gain in the example above.
- No income tax on dividends paid from ISA investments. An ISA millionaire invested in high dividend-paying stocks might receive £50,000 (5%) in dividend income. If these dividends were paid outside of an ISA, higher-rate taxpayers could pay as much as £18,888 in tax (from next tax year).
4. Limiting ISA fees
Small differences in fees can seriously erode the value of your ISA over time. I’ll illustrate this by using my previous example of £334,000 growing into a fund worth £1 million in 2022. Paying 0.5% in annual fees would have reduced that pot to £904,000; you’d have paid nearly £100,000 in fees over a 35-year period.
If you want to be the next ISA millionaire, it’s worth taking the time to review the different cost structures of ISA platforms using our brokerage calculator. Investors with larger value ISAs may want to look at ISA platforms with a flat fee structure, such as Interactive Investor and IG.
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Takeaway
According to a report by the Royal Statistical Society, stocks & shares ISAs will create more millionaires each year than the National Lottery by 2031.
It may seem like an unattainable goal, but regular stocks and shares ISA investments could grow into a valuable nest egg over time.
The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
