The Stocks & Shares ISA is an excellent vehicle for our investments. It’s essentially a wrapper that can be put around a wide range of investments. Any capital gains, dividends, or interest earned within the ISA portfolio is tax-free.
Most Britons have less than £10,000 in their ISA portfolios, but there are around 2,000 ISA millionaires in the UK. It took, on average, 22 years for these investors to get there. So, how did they do it? And how can we get there too?
It takes time
The annual ISA allowance is £20,000 for the current tax year. So, it I wasn’t earning on these savings, it’d take me 50 years to reach millionaire status. And as the existing ISA millionaires demonstrate, it takes time even when we are investing our ISAs.
The top 60 ISA millionaires have pots averaging a whopping £6.2m, according to official data. Either, we can assume that these investors got very fortune, and perhaps invested in stocks that went into overdrive, or they have been religiously topping up their ISAs and reinvesting over time — the latter seems more likely.
Compounding
Assuming we could top up our ISA by the full £20,000 every year, it could take 19 years to reach millionaire status, based on my calculations.
Since its inception in 1992, the FTSE 250 has delivered an average annualised total return of 10.6%. So, let’s assume I’m going to achieve 10.6% a year and every year I’m going to reinvest my dividends as well as my £20,000 contribution.
This is a compound returns strategy. A compound returns strategy involves reinvesting my dividends and earning interest on my interest. Essentially, it’s very much like a snowball effect.
Admittedly, it’s not a perfect science unless the entirety of the returns comes in the form of dividends, but it’s still a useful example.
So, using the above formula, it would take 19 years for me to reach millionaire status. That’s a long time, but this is how it’s done.
Of course, this isn’t how all ISA millionaires made it happen. There are very rare stories of people getting fortunate, especially during the pandemic. But this is the most conventional way of making it work.
Exponential gains
The great thing about a compound returns strategy is the longer I practice it, the more money I’ll have.
Using the same investment strategy as above, I can observe that after 40 years of reinvesting the dividends from my holdings and contributing £20,000 a year, I’d have a staggering £10m. And all those earnings would have been tax free.
Just imagine, if I had that money now, I could invest in stocks like Aviva, Phoenix Group, and Legal & General — collectively averaging an 8% dividend yield — and receive a massive £800,000 a year in dividends.
Obviously, we don’t need to invest £20,000 a year in our ISA. It’s about investing frequently, and over time, the rewards are stunning.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
