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Can you become a millionaire through your ISA allowance?

On my return flight from the Emerald Isle, there was a change of British Airways Business Life Magazine and I found the following article very interesting.  The article was written by Neasa MacErlean who is a chartered accountant turned financial journalist:

About 100 people are thought to have done it so far – produced a tax-free ISA fund worth over £1 million.  They have mainly achieved it by investing their full allowance in each of the 25 years since Individual Savings Accounts (ISAs) and their predecessors, Personal Equity Plans (PEPs), came into being.  So if you have not yet invested, is it too late?

That depends on your age – but if you are still several years from retirement you may still have time. Relatively few investors begin these plans before age 40.  According to Chelsea Financial Services, only 10% of ISA clients are below this age, but once they reach it, investment takes off:  20% of Chelsea’s clients are in their 40s and 30% are in their 50s.  Encouragingly, a couple in which both partners invest their full ISA allowance each year could arrive at £1 million together within 22 years, according to Rathbone Unit Trust Managers.  And, thanks to the power of compound  interest, a single person investing alone would take only another eight years – 30 in total – to reach the £1 million mark.  (Rathbone is here assuming 5% growth per annum of your investment after charges and 2% annual increases in the ISA allowance from the current £11,520.)

Assuming that a couple start investing at 40, Chelsea’s Chief Executive says: “At age 60 – 65 they could then start to enjoy an additional tax-free boost of around £50,000 per annum, by either taking a 5% income from their investment or selling part of it.”  Adrian Lowcock of Hargreaves Lansdown agrees: “This amount of income could make a big difference to someone’s retirement.”

So, if this is so easy, why have only 100 people achieved millionaire status when about 14 million people invest in an ISA each year?  The average investor puts in only £3,700 annually and nearly 80% of people go for the more cautious, slower-growing cash ISA rather than the equity ISA.  Moreover, equity investment is always unpredictable – and you should never invest in stocks, shares and bonds unless you could live with losing much, or even all, of your investment.  That extreme outcome is unlikely but you should stick to safe cash deposits if you cannot live with the risks of the stock and bond markets.

If you do opt for equity ISAs, there are ways of making sure that you reap the full benefits. Invest early on in the tax year – now, for instance – or do it monthly rather than leaving it to a last-minute dash in April. Early or regular investment would have earned you an extra 19% or 14% respectively if you had gone down these routes in the last fiscal year.  Keep the charges down by choosing investment trusts over unit trusts.

For people who end up clearing a million or so, these efforts will all one day seem worthwhile.

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