Yes, it sounds like a pipe dream… but according to the experts, savvy investment in your ISA really could see you become an ISA millionaire by the time you hit retirement age. It might not feel like it at the moment, with the threat of negative interest rates looming – but we’re looking at the long-term goals here.
- How Much You Need to Save
- Transferring Money Between ISAs
- What are Innovative Finance ISAs?
- What ISA Should You Have?
The limit on how much you can put into an ISA per year is currently £20,000. If you’re able to put a certain amount of money into your ISA every year, your money could grow fast and reach the big £1 million in just 25 years time. So even if you’re 40 now, you could put cash in each year and have a nice, rich retirement.
Fidelity Personal Investment worked out the amount of money that you should put in to reach this goal, depending on your age:
- 25-29, £2500 per year
- 30-39, £5000 per year
- 40-49, £10,000 per year
- 50-64, £20,000 per year
The amount your money will grow is based on an assumed annual growth rate of 5%, which Fidelity admits is “conservative”. So really, the growth we’re looking at to reach that £1 million is actually the worst case scenario. Alright, alright – right now, with 0.01% interest rates everywhere, it’s not going to grow your cash quickly. But – that’s if you put your money in a cash ISA. Opt for a stocks and shares, Lifetime, or Innovative Finance ISA, and your cash COULD still grow at those rates.
Good news? We think so! It looks like it’s time to get saving…
Read on for the current ISA rules, for the 2020/21 tax year…
- There are four different types of ISA: cash, stocks and shares, innovative finance and Lifetime ISAs (aka LISAs). You can read more about innovative finance ISAs later in this article
- According to Gov.uk, you can put money into one of each kind of ISA each tax year
- You must be over the age of 16 to open a cash ISA, over 18 to open an innovative finance ISA, and over 18 but under 40 to open a Lifetime ISA
- You can now switch your old stocks and shares ISA to a cash ISA as well as switching your old cash ISA into a stocks and shares ISA (this hasn’t always been allowed)
- The annual limit on how much you can out in a Junior ISAs has been raised as of this year, to £9,000
There are many reasons why you might want to transfer money between your ISAs. These might include the opportunity for higher returns, to reduce costs, because you’ve made a change to how you want to invest, or because you want to consolidate.
You need to be aware of the rules for transferring between ISAs, though. Otherwise, you could lose our tax-free benefits or use up your ISA limit unnecessarily.
If you want to switch between ISAs, you need to contact the provider or bank that you want to move your money to, and get them to arrange the transfer. If you take the money out yourself and put it in again you will have used up your ISA allowance, or some of it, for this year – so avoid doing that! Always make sure the provider does it on your behalf.
You can see more on the rules for transferring between ISAs here.
You’re allowed lots of different ISAs, but you need to choose which one of each type you want to pay into each year. So, let’s say you have a cash ISA, two stocks ISAs, and a Lifetime ISA, you can split your allowance between the cash, Lifetime, and ONE of the stocks ISAs. You couldn’t pay into BOTH stocks ISAs in the same financial year – but you CAN transfer between the two.
The innovative finance ISA is a product that allows savers to put money into social lending platforms via their ISA. Essentially, it allows you to put money into peer-to-peer lending schemes rather than into stocks and shares or into cash. This means money can be put into sites like Zopa, Ratesetter and Funding Circle.
The main benefit is a higher rate of interest than a traditional ISA. This is because you are investing through an online portal rather than via a bank.
There are of course increased risks to this type of ISA (which is likely why those under the age of 18 are not allowed to open them). Although extra protections were brought in, in 2019, to protect investors’ interests, innovative finance ISAs are still not protected by the Financial Conduct Authority. Returns on this kind of ISA are also not guaranteed, as they are in a more traditional savings account.
The majority of those paying into ISAs will see them as long-term investments. You’re not going to become an ISA millionaire overnight. This is likely to be the case if you’re looking to save with a view to becoming an ISA millionaire, too. Because of this, it’s likely that the best place to put your money each year is into a stocks and shares ISA.
It’s worth being aware that if you put your money into a cash ISA and leave it there for longer than five years, you will be effectively losing money as inflation is likely to erode any gains you make. That’s not going to help you on the way to that £1 million!
Long-term, stocks and shares ISAs are very likely to be the best option for higher returns. Check out our articles on index-tracking funds and Jasmine’s article on Nutmeg.com to get some ideas of easy ways to invest in stocks and shares.
Have you had success with your ISA savings? On the way to being an ISA millionaire – or just starting your saving journey? Talk about it on the forums!
- SIPP vs ISAs: Which to Choose?
- What Is a LISA and Should I Get One?
- Why Equities ISAs Beat Cash Savings Every Time
- Make Over £133,000 for Your Child With a Junior ISA
- Turn £25 a Month Into Thousands for Retirement
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.