Can you become an ISA Millionaire?

Karl 21st Apr 2023 No Comments

Reading Time: 4 minutes

This investing post is sponsored by Alliance Trust.

According to HMRC, there are roughly 2,000 ISA millionaires in the UK. Collectively, these individuals have managed to squirrel away £2.8 billion in tax-efficient accounts – an impressive feat!

But is becoming an ISA millionaire a realistic goal for many? And why do so many ISA millionaires turn to Investment Trusts? Keep on reading for all of the details, or click on a link to head straight to a section…

What is an ISA millionaire?

An ISA millionaire refers to an individual who has at least £1,000,000 worth of assets sitting in an ISA. There are 2,000 such individuals in the UK, with HMRC figures suggesting the typical ISA millionaire is sitting on a cool £1.4m.

If you were wondering, an ISA is simply a tax-free saving or investing account. Anything you put in one stays tax-free, year-after year – as long as you don’t withdraw your capital.

However, you can’t just stash unlimited amounts into an ISA. You must stick to the annual ISA allowance which refreshes for every tax year. For the current 2023/24 tax year, which began on 6 April, the allowance is £20,000.

Is it realistic to become an ISA millionaire?

If you don’t already have a small fortune to your name, you may think becoming an ISA millionaire is a tad unrealistic.

After all, if starting today you’d have to put £20,000 into an ISA every single year, for the next FIFTY years, if you want to contribute £1m to an ISA! (Of course, this assumes the ISA allowance isn’t scaled back over the next five decades. It also assumes ISAs will still be a ‘thing’ by 2073!).

The point is, however, that contributing £1m to any type of account is a mammoth task for most people. Yet, the fact that there are 2,000 or so ISA millionaires in the UK right now shows that having £1m in a tax-free pot is possible.

Of course, you don’t actually need to contribute £1m in order to have an ISA pot worth £1m…

ISA Millionaire: The sums

Let’s dig a little deeper into how it’s possible for a regular ISA investment to grow into a six-figure sum:

Imagine a disciplined investor has managed to max his/her full Personal Equity Plan (PEP) and ISA allowances every year for the past 37 years. (PEPs launched in 1986 before being replaced by ISAs for the 1999/2000 tax year).

Under such a scenario, this investor would have contributed a total £286,560 into a tax-fee account (including £20,000 for the current 2023/24 tax year).

While this is still quite a way off £1 million, if we assume average market returns in the region of 5-7%, it would be conceivable for this sum to have hit £1 million over a 37-year period thanks to the magic of regular returns and compound interest.

This is also the reason why an investor looking to become an ISA millionaire today may only need to max their ISA allowance for roughly 25 years – rather than 50 years – assuming he or she achieves a modest 5% annual growth rate, excluding fees.

The takeaway from all this is that all current ISA millionaires have almost certainly benefited from strong capital growth over the past few decades. In other words, ISA millionaires clearly prefer to invest than save!

Of course, the stock market is far from predictable. However, if you desire to have your own £1m tax-free pot in the future, you’ll probably have a better chance of achieving this aim by depositing regular sums into a Stocks & Shares ISA as opposed to a Cash ISA.

ISA millionaires and Investment Trusts

Interestingly, HMRC figures reveal that Investment Trusts make up 42% of ISA millionaire portfolios. Clearly then, Investment Trusts are popular among investors holding £1m+ worth of assets in tax-free accounts.

So why are Investment Trusts often the go-to choice for ISA millionaires? Well, before we answer this question, let’s first explore what an Investment Trust is, and how they work.

An Investment Trust is where a fund manager pools capital from a number of investors with the goal of beating average market returns. Investment Trusts typically invest in a diverse range of assets, such as shares, bonds, and property. Alliance Trust – which is sponsoring this article – specialises in shares and is one of the most held Investment Trusts among ISA millionaires.

It should be noted that Investment Trust fund managers have a lot of flexibility in how they invest. That’s because Investment Trusts are closed-ended, meaning that fund managers have a fixed amount of capital to invest. This is one big advantage that Investment Trusts have over other types of investing, as fund managers know exactly how much money they have to look after.

Investment Trust shares are traded on stock exchanges, and the price is determined by supply and demand. In contrast, open-ended funds have an unlimited number of shares, and the fund’s value is determined by the value of the underlying assets.

One drawback of open-ended funds is that when there is a market downturn, fund managers can face pressure to sell assets to meet redemption requests from investors who want to withdraw their money. This can force managers to sell assets which can hurt returns. In contrast, Investment Trusts are simply not subject to this pressure. This means that an Investment Trust manager can hold on to assets even during a market downturn.

The fact that Investment Trusts are close ended means they’re often considered to be well suited to long-term investors, including ISA millionaires, who are willing to ride out short-term market fluctuations.

Alliance Trust

While Alliance Trust is sponsoring this article, we’re happy to recommend it as a leading Investment Trust. Founded in 1888, Alliance Trust invests in shares globally. It has competitive fees for the industry and uses WTW as its investment manager. WTW is well-known as an investment manager and adviser for large pensions schemes.

One thing we like about Investment Trusts is that they’re allowed to keep 15% of the income they earn each year to boost dividends during challenging years. This is why many Investment Trusts, including Alliance Trust, have excellent dividend growth track records.

Alliance Trust has paid out 56 consecutive years of rising dividends and is committed to extending this track record into the future. This is a big reason why the firm is considered to be a ‘dividend hero.’

To learn more about its offering, and to explore whether an Investment Trust is right for you, take a look at the Alliance Trust website.

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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Can you become an ISA Millionaire?

What is an ISA millionaire?