This year, the ISA — or Individual Savings Account — is 25 years old. Introduced on April 6 1999, you could invest up to £3,000 in cash, and up to £4,000 in stocks, up to a maximum of £7,000 each year.
Inside an ISA, dividends and interest are free of income tax, and any capital gains are free from capital gains tax. Granted, ISAs were subject to inheritance tax on death — if the overall estate exceeded the inheritance tax allowance — but even that has now been relaxed, with ISAs inheritable between surviving spouses and civil partners.
Not surprisingly, ISAs have been a huge success: around 22 million people currently hold an ISA, I’m told. And with the advent of fund supermarkets and online brokerages, it’s never been easier to stuff your ISA with stocks, rather than cash. Perhaps controversially, let me add something else to that last thought. Because with the closure of many High Street bank branches and building societies, it’s also more difficult for consumers to be suckered into cash ISAs offering derisory rates of interest, often below the rate of inflation – which has to be a good thing.
But can an ISA make you wealthy? Genuinely wealthy?
Or are they merely a ‘pin money’ savings vehicle, useful for building up smaller pots suitable for house extensions, new kitchens, or that dream round-the-world cruise?
Make no mistake: ISAs can indeed make you wealthy. Dividend reinvestment in a tax-exempt investment ‘wrapper’, it turns out, is a powerful tool for wealth-building.
For one take on just how powerful a tool this can be, the folks at online brokerage platform Interactive Investor have run a calculation, imagining that someone took out an ISA on April 6 1999, subscribed the full ISA allowance on April 6 every year since, and invested in an averagely performing global investment trust.
There’s nothing remotely complicated about such trusts — there’s a range of them on the stock market — and they’re simply globally-diversified ‘baskets’ of shares. And 25 years on, our hypothetical investor’s ISA balance would stand at £849,354.
It gets better
Now, that’s not a bad return: £306,560 invested; and a pot of £849,354 as a result. Granted, not everybody has the full ISA allowance to hand at the start of each tax year, but investing in smaller tranches over the tax year would be almost as good.
Suppose you can’t afford the full ISA allowance each year? After all, it’s now £20,000. Well, the helpful folks at Interactive Investor did another calculation: someone who invested £5,000 a year over the period — in other words, £125,000 in total. The two scenarios weren’t quite the same, it looks like around £425,000 would result.
But here’s the thing: some people do have the ready cash for the full allowance each year, and do invest it each year. And, what’s more, it appears that their investments do rather better than those of a hypothetical investor investing in an averagely-performing global investment trust.
Now, that’s not a bad return: £306,560 invested; and a pot of £849,354 as a result. Granted, not everybody has the full ISA allowance to hand at the start of each tax year, but investing in smaller tranches over the tax year would be almost as good.
Suppose you can’t afford the full ISA allowance each year? After all, it’s now £20,000. Well, the helpful folks at Interactive Investor did another calculation: someone who invested £5,000 a year over the period — in other words, £125,000 in total. The two scenarios weren’t quite the same, it looks like around £425,000 would result.
But here’s the thing: some people do have the ready cash for the full allowance each year, and do invest it each year.
And, what’s more, it appears that their investments do rather better than those of a hypothetical investor investing in an averagely-performing global investment trust.
The characteristics of ISA millionaires
ISA millionaires are a genuine phenomenon: Google the term, if you doubt me. Earlier this year, online brokerage platform Hargreaves Lansdown reported having 813 on it its books. And you don’t need me to tell you that a million pounds is more than the £849,354 delivered by an averagely-performing global investment trust.
Not surprisingly, all the big brokerages and investment platforms are keen to trumpet the number of ISA millionaires that they have. Many go further, publishing the investment habits and personal characteristics of their ISA millionaires.
They tend to ‘max out’ their ISA allowances each year. They’re mostly in their seventies — although quite a few are younger. (One of Hargreaves Lansdown’s ISA millionaires is an incredible 37.) They tend to invest their ISA allowances at the start of each tax year. They began investing early in life: some even invested in the forerunner of ISAs, Personal Equity Plans (PEPs). And they tend to be buy-and-hold investors, rather than traders – two-thirds of Hargreaves Lansdown’s ISA millionaires didn’t trade their portfolio at all, last tax year. But what is especially interesting is what they invest in — and how that differs from the typical ISA holder.
ISA millionaires’ favourite picks
First, as platform AJ Bell puts it, ISA millionaires tend to have “a preference for solid, established businesses that have been doing the same thing for decades. There are no speculative, blue-sky companies in their portfolios that have a bright idea but do not generate revenue.”
What sort of solid, established businesses, exactly?
Helpfully (as with some other platforms), AJ Bell provides a list. And those solid, established businesses unsurprisingly turn out to be companies such as Shell, GSK, BP, Aviva, National Grid, Legal & General, HSBC, and Diageo.
Second, they’re more open to investment trusts than the average ISA investor. They hold fewer funds — on AJ Bell, for instance, the typical holding in funds is less than half the holding of an average ISA investor — but hold markedly more in investments trusts: one and three-quarter times as much, in fact.
Which investment trusts, exactly? Again, AJ Bell oblige: Scottish Mortgage, City of London Investment Trust, HICL Infrastructure, Alliance Trust, Scottish American, Law Debenture, and Murray International. Again, that isn’t a surprise: older investors will typically have more experience, and will have worked out that investment trusts offer very similar diversified portfolios to expensive funds, but at a lower cost.
A very genuine aspiration
So there we have it.
25 years old this year, ISAs have a proven track record in building wealth: invest for the long term, and reap the rewards. Your own ISA may not be there yet, but don’t give up. Millionaire status is possible.
