The odds on becoming a millionaire through winning the lottery or scooping the Premium Bond jackpot are slim at best. However, with planning, patience and sufficient money available to invest in stocks and shares, by reinvesting all your dividends, and making maximum use of your tax-efficient allowance, it is perfectly possible to become an ISA (individual savings account) millionaire. In fact, hundreds of investors, including many who started to build their tax-efficient portfolios in the 1980s through Personal Equity Plans, have done just that since the ISA scheme was launched in 1999.
ISAs are a great way to invest tax-efficiently, and over the last few years the amount you can save tax-free each year has risen substantially. The allowance for the 2017-18 tax year is set at £20,000, meaning that couples can put away up to £40,000, divided between their respective ISA accounts. Sadly, it seems that the ISA message hasn’t got through to everyone. HMRC has produced data that shows only two thirds of those earning more than £150,000 a year use up their ISA allowance each year.
With pension contributions subject to annual and lifetime limits, ISAs represent an excellent way of topping up retirement income, although the cash or shares could be subject to inheritance tax on death, whereas defined contribution pensions can, in many cases, be passed on to beneficiaries more tax-efficiently.
Making the most of your annual allowance
If you were able to invest your full ISA allowance in a stocks and shares ISA every year, and the ISA limit increased by around 2% each year, and your investments made an annualised return of 5% after fees, you too could join the elite band of ISA millionaires in around 22 years. Of course, we must underline that this is not guaranteed, because stock markets can and do go down as well as up.
How an IFA can help
ISAs have encouraged more people to save for the future, largely because they are simple, flexible and provide an effective tax shelter. If you’re planning to invest this tax year, it’s a good idea to put plans in place as early as possible. The longer your money is invested, the more time it has to produce tax-free returns. Don’t risk losing out on the valuable tax breaks available; remember you can’t carry any unused ISA allowance into the next tax year. An Independent Financial Adviser can help you investigate the choices available, and ensure you invest your allowance wisely.
The value of investments and income from them may go down. You may not get back the original amount invested.