Why investing could hold the key to becoming an ISA millionaire

24/11/2024

According to This Is Money, more than 2,700 people have built up an enviable £1 million in their ISA. Regular contributions and investing could be the secret to reaching this goal. Read on to find out why. 

An ISA is a tax-efficient way to save or invest. In the 2023/24 tax year, you can place up to £20,000 into an ISA. Interest or returns aren’t liable for Income Tax or Capital Gains Tax. So, compared to some alternatives, using an ISA could help to reduce your overall tax bill. 

The number of ISA millionaires has increased by 380% in five years

During the 2016/17 tax year, there were just 570 ISA millionaires. Five years later, in 2020/21 – the latest period for which data is available – there were 2,760.

ISAs were first introduced in 1999 to encourage more people to save. Government statistics suggest they’ve achieved that aim.

In 2021/22, around 11.8 million adult ISAs were subscribed to. During that tax year, ISA holders deposited around £66.9 billion. 

Using your ISA annual allowance is essential for becoming an ISA millionaire

If you want to get the most out of your ISA, using your full ISA allowance each tax year could be essential – if you don’t use your annual allowance, you lose it. You cannot carry it forward to a new tax year. 

While a £1 million target may seem out of reach, regular deposits mean you’re making steady progress towards your goals. 

Remember, each person has an ISA allowance. So, if you’re planning with your partner, you could put away £40,000 between you each tax year by using both of your annual allowances.

If you want to create a nest egg for children, a Junior ISA (JISA) could also be a useful option. In the 2023/24 tax year, you can deposit up to £9,000 in a JISA and, like their adult counterparts, this can be held in cash or invested, and they are tax-efficient. 

Assuming the JISA annual allowance doesn’t change, if you deposited the maximum amount each tax year from birth until they are 18, your child could have £162,000 when they reach adulthood before interest or investment returns are considered – giving them a significant head start on reaching £1 million. 

Keep in mind, that money cannot usually be withdrawn from a JISA until the child reaches 18, at which point they will have control over how they use it. 

Using your ISA annual allowance alone isn’t enough to reach the £1 million milestone

Over the years, the ISA annual allowance has changed. Between 1999 and 2008, it was just £7,000 each tax year. It then increased over the years until it reached £20,000 in 2017/18.

Someone who opened an ISA account in 1999 and deposited the maximum amount each tax year would have added more than £291,000 to their account by 2023/24.

So, how have people reached the £1 million milestone?

How your money grows once you deposit it in an ISA is crucial. If you leave the interest or returns in your ISA, you benefit from compounding, which could help your money grow at a faster pace over the long term. 

However, people holding their money in Cash ISAs are unlikely to have generated enough interest to reach £1 million.

Over a long time frame, interest is typically lower than returns. In addition, a period of more than a decade where interest rates were historically low following the 2008 financial crisis may have harmed savings. 

Investing through a Stocks and Shares ISA might be the key to becoming an ISA millionaire.

While investment returns cannot be guaranteed, investing in appropriate stocks and shares could help you reach your goals. 

When investing, it’s important to remember that all investments carry some risk. Understanding your risk profile could guide your decisions so you can assess which opportunities make sense for you. 

The government figures indicate that many people could be missing out on potentially higher returns due to holding money in cash – in 2021/22, around 6 in 10 ISAs were Cash ISAs.  

That being said, a Stocks and Shares ISA isn’t always the right choice.

Holding your money in cash may be appropriate if you’re saving for short-term goals or you need easy access, such as if it’s an emergency fund. 

Setting goals for your money may help you decide if saving or investing is right for you. 

Contact us to talk about how you could get more out of your savings

If you’d like to learn how you could grow your savings more effectively with your goals in mind, please contact us. We can work with you to create a financial plan to get the most out of your money. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.