The Motley Fool

Forget The National Lottery! A Stocks and Shares ISA is how I’d aim to make a million

With around 70% of the UK population playing The National Lottery on a regular basis, it’s clear it’s a popular pursuit. By contrast, Stocks and Shares ISAs continue to be relatively unpopular. There are only 2m Stocks and Shares ISA accounts opened a year, on average, which suggests there’s a limited pool of individuals benefitting from the tax advantages the product offers.

Of course, becoming an ISA millionaire can take a long time. While it’s possible to become a millionaire in a very short space of time with the lottery, a Stocks and Shares ISA could offer a surprisingly high chance of significant wealth creation over the long run.

Tax advantages

As mentioned, an ISA offers significant tax advantages. Although contributions are subject to income tax, there are no taxes levied on amounts within an ISA. This means individuals can avoid paying capital gains tax and dividend tax during their lifetimes. Withdrawals from an ISA are also tax-free. This may make it easier for an individual to budget effectively in retirement, and could make the process of determining the savings required in retirement somewhat simpler.

Growth potential

Clearly, the more that’s invested in an ISA each year, the higher the chance of making a million. However, even for modest amounts of capital, there’s the potential to generate high returns over an extended time period. The stock market has a long track record of delivering high single-digit returns each year. With the impact of compounding, they could lead to £1m being generated.

For example, investing £250 per month at an 8% total annual return over 45 years would lead to a nest egg of £1.15m. Although investing £250 per month may not be possible for everyone, the example shows that when there are no taxes to pay and an individual has the time to allow compounding to impact on total returns, it’s possible to produce a significant sum of money in the long run.

Simplicity

Buying a lottery ticket is straightforward. They can be bought at a variety of shops, while it’s also possible to set up a direct debit each month. An ISA, though, really isn’t any more difficult to set up and administer. Direct debits from a current account can be created very easily, and an individual can set up an automatic investment in a tracker fund that provides a high degree of diversity. This would reduce the amount of research and ongoing administration required on the part of the investor. They could just sit back and relax.

As such, ISAs are very accessible and could be worthy of investment for much more than the 2m people who open them each year. They appear to offer a far more reliable means of making a million than the lottery.

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