Charles Stanley Direct won the Best Investment ISA – Large Portfolio category for the first time at the YourMoney.com Investment Awards 2024.
As part of YourMoney.com‘s spotlight series for our award winners, Rob Morgan, chief investment analyst at Charles Stanley Direct, shares five ways to become an ISA millionaire.
ISAs are a valuable shield against tax. You can currently put away up to £20,000 per year, and any income or investment gains are free from income tax or capital gains tax (CGT) – no matter how much money you make.
Getting to over £1m in your ISAs might sound unachievable, but it’s not as unusual as you might think. Thousands of people have built up seven-figure pots – and there’s no reason why more can’t join them given enough time and determination.
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Here are some tips on how to maximise ISA wealth – and possibly get to that £1m mark!
1) Use the stock market to your advantage
ISAs are available either as cash or stocks and shares, but it will likely take far longer to become an ISA millionaire if you leave your money in cash, as interest rates don’t generally keep up with inflation. ISA millionaires tend to invest in the stock market and ensure they reinvest their gains and dividends regularly to leave relatively little in cash.
Some people are naturally risk-averse and find it difficult to take risks with their money. However, the longer you can remain invested, the more reliable the broad stock market becomes – but it does come at the expense of greater short-term swings in the value of your capital.
If you manage 5% annual investment growth after charges, you would hit the million-pound mark in 25 years with £20,000 invested each year. However, with a higher return of 7%, it would only take 21 years. Achieving a 2% return would stretch the necessary time to 34 years, which illustrates why long-term investors avoid holding lower-risk assets.
2) Maximise contributions and start early
The size of any portfolio is a function of two things: how much is put in and the return generated. Since the advent of ISAs, and their forerunners PEPs from 1987 to 1998, all the available allowances would amount to just over £400,000. This would have produced a pot worth just over £1m today, assuming a modest 5% growth each year, not to mention removing a huge headache in terms of reporting and paying tax on income or gains.
With many demands on our money, it may not be realistic for many people to use their full ISA allowance each year, but the more you save and the earlier you do so, the better. Putting aside a small amount each month can snowball into a sizeable sum if you get the ingredients right. The important thing is getting started, and the earlier you do the more time your chosen investments have to grow.
Don’t forget that it’s not all about ISAs. If you are investing for retirement, then a pension will give you an extra leg up in terms of tax relief, and if you are in a workplace scheme, you’ll get valuable employer contributions on top so you should prioritise this form of investing.
All else being equal, it’s easier to accumulate a million-pound pension pot than an ISA one. Investment gains are similarly tax free, though you need to pay tax on when you take money out (generally beyond the first 25% under current rules) and you won’t be able to withdraw before your late 50s.
3) Get the risk level right for you
It will always take a long time to become an ISA millionaire unless you are exceptionally lucky or insightful and pinpoint very lucrative individual shares that rocket in value. Yet having a considerable amount invested in a single share means your success rests on the fortunes of a single company, so it means a very high level of risk. You could face losses that are impossible to recover from if you are unfortunate.
Most people will rightly decide against such a strategy, though for those prepared to dedicate the time to thoroughly researching companies, it can sometimes be fruitful. What tends to unite successful private investors in shares is the enjoyment of the challenge of navigating a profitable path through markets and taking a keen interest in researching investments.
This tends to take a lot of time and dedication – and some luck too. However, if you’re not an investment whiz, then make sure you diversify appropriately to guard against the poor performance of one or several stocks.
4) Use funds if you are not a share expert
Fortunately, for those who are more ‘hands off’ or time-constrained, there are convenient ways to spread the risk and still generate decent returns from your ISA.
Many new investors ask, “what’s the safest investment?”, to which the answer is not one, but many. In other words, diversification. Funds and investment trusts allow you to spread your money among lots of different shares at the same time, meaning the risk is spread out.
Picking funds is not straightforward, but it tends to be easier and less hands-on than researching individual company shares, and ultimately it can be lucrative without taking as much risk as individual shares. If in doubt, a global tracker fund that simply invests across all the world’s major companies is a great place to start.
5) Be patient and disciplined
Today’s ISA millionaires have seen many booms and busts, but being too reactionary and trading over the short term can be unwise – even if political or economic reasons seem compelling. Not only are outcomes unpredictable, but so are their effects on financial markets.
It’s usually best to stick out tough times, stay invested and keep adding to your investments. As a patient investor with a long-term horizon, time is on your side. Leaving money untouched and reinvesting returns is crucial to allow the magic of compound interest – earning returns on your returns – to take effect. That way the path to a million-pound ISA is slow but sure.
Rob Morgan is the chief investment analyst at Charles Stanley Direct
Charles Stanley Direct is a personal financial service combining a modern digital experience with the traditional client-focused values of private wealth management. It provides all self-investors with the knowledge, tools, products, and services to take control of their financial futures and realise the rewards of their investments.
