Is it worth becoming an ISA millionaire?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
According to the latest research, there are now a record 4,000 ISA millionaires in the UK with the average pot value standing at £1,397,000. This follows a trend over the last three years, where the numbers have almost tripled annually. There are even 50 savers in the UK with over £8,509,000 in their ISA accounts.
Is it worth becoming an ISA millionaire? Below, our Grantham financial planners examine the benefits and drawbacks of using ISAs – especially from a tax perspective. We also offer some practical ideas about how ISAs can be integrated into a wider investment and estate plan.
We hope these insights are helpful. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Why do people want to become ISA millionaires?
ISAs are immediately attractive due to the range of tax benefits they offer to savers and investors. In 2023-24, an individual can contribute up to £20,000 to his/her ISAs (in total) each tax year. Any capital gains, dividends and interest earned inside will be tax-free.
This can offer some powerful returns if a prudent ISA portfolio is constructed patiently over many years. For instance, suppose an investor holds £500,000 in shares which pay an average of 4% in dividends each year. This could provide a “passive income” of £20,000 which is completely free of tax. Normally, dividends earned outside of an ISA are taxed after exceeding the tax-free threshold (which currently stands at £1,000; in 2024 it will be £500).
What it takes to become an ISA millionaire
There is a £20,000 annual cap on how much an individual can contribute to ISAs. Over ten years, therefore, a £200,000 ISA portfolio could be built. Setting aside any capital growth, it would take a long time to become an ISA millionaire.
Yet by achieving steady returns over many years, and by making full use of the annual ISA allowance, an investor could hope to achieve this status in 20-30 years. The question, at this point, is whether focusing your portfolio on your ISA is the best strategy.
The drawbacks and limitations of ISAs
Financial planners often advise clients to consider “diversification risk” when choosing investments – i.e. the dangers of putting too much wealth in a single company, asset type or market. The same principle applies when choosing “vehicles” for your savings and investments.
For instance, suppose you become an ISA millionaire after many years of hard work and discipline. However, what if the government later changes the rules about ISAs? Perhaps various tax benefits are removed such as the ability to generate capital gains without tax. In this scenario, an ISA millionaire could face some difficult decisions.
Conversely, an investor might choose to build his asset base using a range of tax-efficient “tools” to shield against such a possibility. Perhaps he maximises his ISA allowance each year but also contributes to his pension, builds up equity in his home and makes full use of other non-ISA allowances (e.g. the Capital Gains Tax Annual Exempt Amount). This makes his wealth far less vulnerable to changes in government policy.
Using an ISA strategically
What is the best way to apportion your £20,000 ISA allowance? There are a few questions and principles to bear in mind. Firstly, how much should you contribute in total each year? The answer will largely depend on your financial goals and situation.
For instance, if your emergency fund is currently running low (i.e. you have less than 3-6 months’ worth of living costs stored in easy-access savings) then you might consider a Cash ISA as a possible option for building this up.
Conversely, if your priority is to get onto the housing ladder in the next few years then you might want to consider the Lifetime ISA to help boost your savings potential. Each year, the UK government will “top up” an individual’s Lifetime ISA contributions by 25% up to a maximum of £1,000 (the most you can personally contribute annually is £4,000). However, please note that there are penalties for withdrawing funds before age 60, if this is for any other purpose than purchasing a first home
By contrast, an individual in later life may be more concerned with her estate plan – i.e. optimising her assets so they can be passed down to loved ones with minimal inheritance tax (IHT). Here, an ISA may be less suitable because savings and investments held in an ISA are not automatically IHT-free. Conversely, those held within defined contribution pensions are exempt from IHT in the majority of cases. Therefore, the individual may even wish to transfer much of her ISA portfolio over to her pension.
It is also important to consider your own investment risk tolerance and wider asset base when approaching ISAs. If you are a naturally “cautious” investor, then you may wish to steer away from higher-risk options (e.g. the Innovative ISA) and instead consider more stable investment options within a Stocks & Shares ISA, such as government bonds. If you have remaining tax-free allowances outside of your ISA in the current tax year, you may benefit from seeking financial advice about how to best integrate these into your wider tax plan. For example, you may not wish to “waste” your ISA allowance on your Cash ISA if your Personal Savings Allowance will already let you earn interest from savings without tax.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
