Would you believe that there are already around 200 ISA millionaires in the UK?
Including the PEPs and TESSAs thatpreceded them, these tax-free investment vehicles have been in existence for 30 years now, with PEPs first introduced in the 1986 budget and the complementary TESSAs joining them in 1990.
Its a fair guess that a good number of those ISA millionaires have been in it right from the start, transferred their PEPs and TESSAs to ISAs, and used their full allowances every year. And if thats what can be achieved in 30 years, just imagine what heights you could reach over a full lifetime of investing!
What 30 years can bring
First, lets think about what you might accumulate over the next 30 years and see if you could match these ISA millionaires. Well assume youre able to use up your entire ISA allowance of 15,240 every year, investing it in 12 monthly installments of 1,270. How much would that bring in?
It all depends on the annual rate of return you can get, and if you stashed your savings in a cash ISA offering 2% annual interest (and a lot of them offer less than that), youd finish your 30-year stretch with approximately 625,000 in the bag. Of that, 457,000 would be your own contributions with the remaining 168,000 coming from compound interest, and you might not think thats too bad.
But what if you invest in shares instead, and reinvest any dividends you earn? An average annual return of 6% per year including dividends isnt at all an unreasonable expectation (and Id say its probably quite conservative). Some years youd do better than that, others not as good, and some years youd actually lose money but with 30 years at your disposal, those short-term ups and downs will even-out and its the long-term average that counts.
With an average of 6% a year from shares, your ISA value would grow to around 1,244,000, easily getting you into the ISA millionaires club. Whats more, instead of the 168,000 in interest from a cash ISA, youd be 787,000 in profit from share price appreciation and reinvested dividends!
A full life of investing
Now lets extend our what if? thinking a little further. Its obviously unrealistic for the vast majority of us to use our full ISA allowance from the day we reach 18, so Ill go with the following scenario
Firstly, your parents start a Junior ISA for you when youre born and invest the full 4,080 annual allowance, then when you reach 18 it converts to a standard ISA and you manage to invest 500 a month until you reach the age of 30. From then on, you use up your full allowance every year for the next 30 years. How much do you think you might have to celebrate your 60th birthday, assuming the same 6% return each year from shares? Go on, have a guess before you look down and find out
Would you be surprised to learn that, through your ISA investments, youd end up with a cool 3.35m, all tax free? The same plan, only invested in a 2% cash ISA, would fall short of the million pound target with a total of just 975,000.
Convinced yet?
The lesson is clear. If you want to reach millionaire status, invest as much of your annual ISA allowance as you can, start as early as you can and put it in shares!
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