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The ISA millionaire – lottery or limited?

14 April 2022 Investment Styles, About Alliance Trust, How to Invest, Company News Alliance Trust

If one had a pound for every piece of research on ISA millionaires one might be an ISA millionaire by now.  

An exaggeration clearly but for some years now, since the first individuals who had saved into ISAs or personal equity plans (PEPs) as they were called initially, hit the £1m mark in terms of the amount invested and what those investments had grown to, providers have been touting the ISA millionaire club.  

Personal Equity Plans (PEPs) were introduced in 1986 and phased out when ISAs were brought in, in 1999. The initial annual investment allowance was £6,000 and this has gradually been increased to the £20,000 it is today.  

The total amount that could have been invested if one had used the full allowance each year would have been £266,560 and a total of 30 investment companies would have made investors more than £1 million if they had invested the full annual ISA allowance in the same company each year, according to the Association of Investment Companies (AIC). 

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC) said: “The closed-ended structure of investment companies, with a fixed portfolio of assets, makes them particularly suitable for long-term investing. This is because they can hold on to investments through market crashes, at a time when open-ended funds are often forced to sell in order to meet investors’ demand for cash. Investment companies can also more readily invest in smaller companies and companies not quoted on public markets, which feature strongly in our list of top performers over this period.  

“However,” she adds: “it’s always important to spread your risk, as no-one knows which will be the best-performing investment companies in the future. Having a diversified portfolio which suits your long-term needs is key, and investors who need guidance should speak to a financial adviser.” 

Investment platform interactive investor (ii) has 983 ISA millionaires on its books. It also says that whereas investment trusts have historically tended to play second fiddle to funds in terms of popularity,theyaccounted for 46% of the average ISA millionaire account, compared to 7.6% for funds. 38% was in equities, 3.1% in ETFsand just 4.6% in cash.  

Moira O’Neill, Head of Personal Finance, interactive investor, said: “Our ISA millionaires’ portfolios are being powered by investment trusts. Top holdings are also dominated by FTSE 100 blue chips, particularly oil, pharmaceuticals, banks and telecoms– holdings that could help ISA millionaires in the race against inflation. 

But O’Neill warned: “Investors need to think about their own risk profiles. Investment trusts, for example, often tend to outperform funds in a rising market due to structural advantages such as the ability to gear. But in a falling market, these features can also enhance losses. And key to building up those ISA pots is to fully utilise the very generous £20,000 annual ISA allowance, something that only the very fortunate are able to do.Accumulating £1 million in your ISA pot is a long-term game. 

Amongst the ISA millionaire’s top 10 holdings, Alliance Trust wasmost held, followed byScottish Mortgage Trust. The other most popular holding are Shell plc, GlaxoSmithKline, Lloyds Banking, National Grid, BP, Vodafone Group, Aviva and Witan Investment Trust.  

ii calculates that if you were to start now and invest the full £20,000 annual ISA allowance (assuming it stays the same), with 5% annual growth excluding fees, it would take 25 years to reach £1,002,269.08. A growth rate of 7% would achieve £1,048,722.82 in 22 years, while at 3% annual growth, it would take 31 years to reach £1,030,055.17. 

Investment platform Hargreaves Lansdown has 973 ISA millionaires on its books, the average age of which is 72 and just over two thirds of them are men.  

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown: said “The number of HL ISA millionaires is up more than two thirds in a year. They benefited from rises in global markets over the past 12 months, and were boosted by another £20,000 allowance, but they also hold the lesser-known secret to making a fortune from ISA investments: getting rich slowly. 

ISA investors don’t take enormous risks. More of them hold collective investments than single shares. Their focus is to consistently invest as much as possible of their annual allowance, as early as possible in the tax year, in a diverse and balanced portfolio. And they’ve done this every year for decades.” 

She adds that there are some exceptions to the rule in that there are some clients who have built a million in quick-time, and are still only in their 20s or 30s. 

Hargreaves ISA millionaires, when investing in shares opt for the blue-chip companies in the main, including those that traditionally pay strong dividends. 

“It means most of them aren’t speculating, they’re investing for the long term,” sales Coles, “When it comes to funds and other collective investments, ISA millionaires have a broad international mix of popular funds.” 

Income funds she says reflects the fact that as investors get older, some of the portfolio may have been reconfigured for income. But that also when investors have a larger portfolio, they have more scope to add specialist funds into the mix too, which is why explains Hargreaves seeing micro-caps and special situations in the most popular choices for its ISA millionaires.  

In January, HMRC, following a Freedom of Information (FOI) request from comparison review site Investing Reviews, revealed that the average ISA millionaire has a pot of £1.4million while the country’s 60 biggest ISA holders average an eye-watering £6.2million. 

It’s a sizeable sum and while it won’t be realistic for most investors, especially given they have other options to focus on as well such as pensions, it’s certainly achievable for some providing they start early and remain invested for long enough and, of course, it depends on how markets and their investment choices perform. Someone consistently investing £20k a year – the current ISA allowance – will get to the magic million mark in 23-years if they can get an average annual return of 6%.  Historic equity returns have been higher than this. 

It is of course the case that ISAs are not the only ways – certainly not the only tax efficient ways that one could save towards being a millionaire. ISAs offer tax efficiency with lots of flexibility but pensions are really important too. Together, these two allowances should be the key pillars of a long-term financial plan.   

Jason Hollands, managing director, corporate affairs, Tilney Investment Management Services 

says: “Pensions win hands down when it comes to the tax perks because contributions to them include upfront tax relief at your marginal income tax rate. For a 40% tax payer, this means £10k of pension investment has a net cost of £6k. Any remaining assets in a pension when you die can also be passed on tax efficiently too. 

But pensions have restrictions. For starters, these can only be accessed when you are 55 (this is set to rise to 57) and the amount that can be withdrawn from them tax free is limited to 25% of the total pot. 

Meanwhile, Hollands adds: “While ISAs might not have the same upfront tax boost as a pension, all returns within them are tax-free so the value of the tax efficiency builds over time and there is not tax on the withdrawals. As you can access your ISA assets whenever you want, this makes them really useful for all sorts of savings goals including saving for education fees, wedding costs, paying off a mortgage or having a dream holiday. 

So, it makes sense to consider a combination of investing in an ISA and a pension – and after all,the underlying investment choices on offer are the same  bearing in mind the principle of diversification and having a range of funds in your portfolio 

“The right mix of assets, markets and sectors within an ISA will depend on your goals, risk tolerance and likely time horizon and so one size does not fit all,” Hollands advises. “While equities can be expected to deliver the highest returns over the long run, they can also be very volatile over shorter time periods. Therefore, the longer you expect to remain invested, the greater exposure you should consider to equities as you will have long periods to recover from any short-term setbacks.  

As time horizons shorten, or for those who are very risk averse, equity exposure should be tempered by also holding less erratic assets or investments that will perform differently from equities. These can include bonds, infrastructure, property and gold. Whatever asset allocation you choose, it is important to periodically review it and rebalance your portfolio, because different asset classes don’t all grow neatly in tandem and therefore if you don’t do this, you could find that over time the risk profile of your portfolio could drift into a much higher risk one than might suit you. 

Becoming an ISA millionaire is not practicable or achievable for many people, most one could argue, but the goal is to play for if you start early enough and invest enough.  

Whether you have £20,000 a year or £20 a month to invest – don’t be deterred from doing something.  


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