Earlier this year it was revealed that there are now in excess of 1000 ‘ISA millionaires’ in the UK – ie. people with over a million pounds held in Individual Savings Accounts – commonly known as ISAs.
ISAs were introduced in 1999 to replace Personal Equity Plans (Peps), which had been around since 1987, and Tax Exempt Special Savings Accounts (Tessas). The annual limit an individual is able to save into an ISA each year has increased over the years and currently stands at £20,000 per year.
One of the main benefits of building up a substantial sum of money within ISAs is that there are no tax implications on any income or gains made within the ISA. Furthermore, and a key point that is often overlooked is that funds withdrawn from ISAs are also tax free. In this manner, savvy investors, or those that followed the advice of a financial adviser, will have recognised that by maximising the annual amount that can be contributed to an ISA each and every year, a sizeable pot of money could be built up that could be accessed in retirement without any income tax or capital gains tax payable. Another benefit of ISA savings over other forms of long-term saving, such as pensions, is that funds can be accessed at any time should they be needed.
We have several clients that also have built up their ISA funds in this way over the years alongside contributing to a defined contribution pension. In retirement, these clients will be able to access funds from both pots, therefore potentially giving themselves a not-insignificant retirement income with no tax payable. Even those that have used up their tax-free pension pot and enter into pension drawdown, when combined with taking an income from ISAs, it is often the case that they will still only be basic rate tax payers or even become a non-taxpayer.
Even if you don’t make it to £1 million, or even close to that figure, the benefits of ISAs still apply.
Of course to get to the point of being an ISA millionaire, you’ll need to take a disciplined approach; investing the maximum allowance each year for several years. At the current maximum of £20,000 per year, it would take 50 years to accumulate £1,000,000 with zero growth. So it goes without saying that in order to obtain the best chance of investment growth and build your pot over a shorter timeframe, you’ll need to invest in stocks and shares ISAs rather than holding in cash.
Those that have become ISA millionaires already will have had to take a fairly significant level of risk and will probably have had their fair share of luck.
The earlier you can start to accumulate savings in ISAs, the greater the opportunity compound interest will have to work its magic.
To summarise, our top tips on building ISA wealth are:
- Consider maximising your ISA allowance each year – currently £20,000 per annum
- Consider reinvesting your dividends/interest
- Be prepared to take a moderate level of risk
- Look to invest for the long term
- Take a long-term view and try to ride out any periods of volatility
For more information or to access tailored financial advice for your personal circumstances, please get in touch to speak to one of our Chartered Financial Planners. The contents of this article are for information purposes only and do not constitute individual advice.