Become an ISA Millionaire To Live An (Almost) Tax Free Retirement

Oooh it’s an enticing word. Millionaire. It definitely doesn’t have the same real life value as it used to, but it still conjures an image of parties on yachts in Monaco or beach lounging in Barbados.

With that image in mind, the idea of an ISA millionaire might seem a bit strange.

You probably already know that the annual amount you can contribute into an ISA is £20,000. It’s a fairly modest figure, and at first glance it’s hard to imagine it amounting to millions. £20,000 a year surely isn’t going to get you on that yacht. Is it?

You might be surprised. While you’re not likely to be able to fund a full Jeff Bezos lifestyle on your ISA alone, you’ll probably be shocked at just how much wealth you can accumulate in this incredibly generous account.

In this article we’re going to go over why you should want to become an ISA millionaire, and give you a practical road map as to how you can actually do it.

Just so we’re clear, we’re focusing on the standard Stocks & Shares ISA for this article. There are a number of other ISA types like the Lifetime ISA and Innovative Finance ISA, and of course there's the Cash ISA as well (*cough* waste of time). 

For the vast majority of people, focusing on the Stocks & Shares ISA is the way to go.

Do ISA millionaires exist?

Yes! We’re not talking about hypotheticals here. It’s definitely possible to accumulate millions within an ISA, and according to recent data released from HMRC, there are now 2,000 ISA millionaires in the UK.

Now remember, there has always been a limit on the amount of money you can contribute into an ISA, and in fact the £20,000 limit is actually higher than it used to be. Back in 1999 when ISAs were first introduced, the limit was just £7,000.

Not only that, but the limit only started to creep up in 2008, and didn’t hit the current £20,000 limit until 2017.

So we’re not talking about billionaires and CEO’s finding loopholes. Anyone who can afford to fill an ISA up to the limit has the chance to become an ISA millionaire…and then some.

The average ISA millionaire has a lot more than £1m in their account. In fact, according to that same HMRC data, the average ISA millionaire has an account worth £1,412,000.

Even more incredible, the top 60 accounts have an average balance of £6.2 million. That’s enough to generate around £350,000 on average each year, based on returns of 5.6% — tax free!

That’s not to be slept on.

ISA fundamentals

So we’re banging on about the benefits of an ISA here, but we’ve not actually laid out exactly why we get so excited about them. As financial advisors and money managers, one of our biggest jobs is to help our clients save tax.

Tax is one of the biggest drags on investment returns and personal wealth. If you’re brave enough to look at your payslips each month, you'll know just how much of your hard earned money disappears into the government coffers.

But of course, we want to make sure that we’re saving tax in ways that are totally above board and ideally, simple to implement. 

With that in mind, an ISA is a total free kick.

That £20,000 that you can contribute into an ISA can be put in with no tax charge. Once it’s in the ISA wrapper, it can then grow completely free of tax. No capital gains tax, no income tax, no dividend tax. Nada. Nothing. Zero.

It gets better. 

When you withdraw money from your ISA, you don’t pay any tax on that either. So to sum up why ISAs are such a great planning tool, it comes down to just two words. Tax free. No catches and no caveats.

Why should you want to become an ISA millionaire?

So with that said, it should be pretty obvious why you should want to become an ISA millionaire. The more assets you can build up in this tax free account, the more flexibility you’ll have in the future.

It means you can withdraw funds for regular spending or one off costs, without having to worry about the tax hit you’re going to take on the sale. Imagine you sold an investment property worth £400,000 in order to access the capital for something else.

If you’d made a £200,000 gain on that property and you were a higher rate tax payer, you’d be looking at capital gains tax of £52,556.

Withdrawing £400,000 from an ISA with the same £200,000 gain would mean zero tax to pay.

This is particularly relevant for many of Rosecut’s clients, who are internationally mobile. Moving assets between different countries can be fraught with tax and legislative issues, particularly when talking about things like pensions.

ISAs don’t have that problem. At any time, you can cash the whole thing in, completely tax free.

How to become an ISA millionaire

So now you can hopefully see why you should want to become an ISA millionaire, let's look at how you can do it.

To start with, we’ve got that £20,000 annual limit, so obviously to get there as quickly as possible you’re going to want to maximise that. 

The other major variable is the returns you can achieve. This will depend on how much risk you’re willing to take, so we’ll provide a few different outcomes based on a couple of different levels of risk.

Keep in mind these figures are all nominal and don’t take into account inflation. 

But maybe you can’t afford to contribute the full £20,000, or you want to contribute to other investments as well as your ISA. Can you still become an ISA millionaire? You can. Below are some further figures that look at how achievable it could be based on contributing £10,000 per year instead.

So yeah, it’s a lot harder to hit those figures if you’re not contributing up to the limit, but either way, it’s still possible to build a sizeable pot in a totally tax free environment.

What’s that? You want to be one of those kings and queens with the £6 million pot? Sure, let’s run those numbers too. Fair warning though, you’re going to need to get very lucky with your investment choices (like, roulette wheel lucky) or invest for a seriously long time. Or both.

What’s next?

As you can see, the earlier you start, the more likely it is that you’ll eventually become an ISA millionaire. And while we’ve talked a lot about ISAs and how awesome they are, that doesn’t mean they’re going to be possible for everyone.

For example, only UK residents are able to contribute to an ISA, and US citizens will likely find dealing with the IRS a challenge when it comes to these accounts.

If you want to have an initial discussion about how to fit ISA investments within your portfolio, book in a call with us today.