The number of savers who have built up a million-pound, tax-free nest egg by investing in stocks and shares has rocketed – rising by 380 per cent in the past five years.
There are nearly five times as many people with £1 million or more in a tax-free Individual Savings Account (Isa) than there were in 2017, Wealth & Personal Finance can reveal.
Figures from Revenue & Customs, obtained through a Freedom of Information request by stockbroker InvestEngine, show there were just 570 Isa millionaires in the 2016-17 tax year. That rose to 2,760 in 2020-21 – the latest period for which data is available.
Living the high life: The number of savers who have built up a million-pound, tax-free nest egg by investing in stocks and shares has rocketed
How have they done it?
These millionaires have earned their substantial nest eggs by putting their money into investments – it would have been impossible to reach the coveted £1 million mark by earning interest on cash savings.
That is because there is a limit to the amount you can pay into an Isa every year.
Today, savers have a £20,000 annual allowance – spread across both cash and stocks and shares Isas. But the limit used to be lower – between 1999 and 2008 you could save just £7,000 a year into a stocks and shares Isa.
Even if someone had put in their entire allowance each year since Isas were introduced in 1999, they would have paid a total of £291,680 into their account.
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If they had put this money into cash Isas – for which the limit was £3,000 a year during the same period – and earned the average interest rate, they would have amassed £274,651, calculations from InvestEngine find.
Andrew Prosser, head of investments at the stockbroker, says: ‘Even a cash Isa holder who received an unrealistically generous 10 per cent interest rate a year and maxed out their account every year since 1999 would still fall well short of millionaire status.’
Stocks and shares usually perform more strongly over the longer term than leaving money in cash, although the value of investments can go down as well as up.
To reach £1 million within 30 years, you would need to invest £1,120 a month and achieve a return of 5.5 per cent after fees, according to fund group Vanguard.
‘I’m aiming for £1m by age 50’
Chris Palmer is one investor who has made this his mission. The 34-year-old from North Wales started investing in Isas at age 20 and is aiming to hit the £1 million mark by the age of 50.
Ambition: Chris Palmer aims to hit £1m target at 50
By age 26, the freelance website designer had grown his Isa pot to £100,000, which he drained to buy his first home. He then started to build his pot again from scratch.
He has changed his investment approach dramatically over the years. The biggest difference is that he now rarely invests in single stocks, instead favouring low-cost tracker funds.
These funds, also known as ‘passive’ investments, track certain markets and move in tandem with them. The large number of stocks held within a single fund means returns are typically far less volatile than on individual stocks.
Chris says: ‘I started out by taking really bad advice. First, I was investing in single stocks.
‘But to make it worse, my friend, who was into investing, told me not to put my money into big tech companies like Apple or Netflix because they were “overvalued”.
‘So I went for more boring, smaller UK companies, which in retrospect was a massive mistake as Apple and Netflix did incredibly well over that time period.’
But Chris, who invests via InvestEngine, says his biggest lesson was to avoid trying to time the market or beat it.
‘You can do well by matching the world market,’ he says. ‘It means my returns are more reliable and it removes the day-to-day stress.’
Costly mistakes have set him back at times. One of his biggest blunders was investing in a Russian market index, in which he lost £25,700 when the war with Ukraine broke out and the fund was delisted. He has not been able to recover his investments.
He currently has £228,000 saved across a Lifetime Isa (available to those aged under 40), his self-invested personal pension (Sipp) and an Isa.
Chris has 22,500 followers on his YouTube channel, where he shares updates on his investing progress.
‘It’s important to talk about the mistakes and setbacks,’ he says.
‘I was lucky to have a friend who showed me how he was investing when I started, so I decided to do that for others and talk about my successes and mistakes on YouTube. It’s not advice, just regular updates on how I invest.’
Chris’s strategy to reach £1 million across his Isa and Sipp is to consistently invest large chunks of his savings in assets with steady returns.
By contributing the maximum £20,000 a year into his Isa, he believes this will be possible within the next 16 years. But it won’t be easy.
Chris lives frugally so he can save as much as possible. He hasn’t bought a new car in a decade.
Chris says: ‘I put all my spare money into the Isa and find it to be really rewarding.’
Far from a sprint, becoming an Isa millionaire is all about playing the long game.
FIVE TIPS TO HELP YOU BECOME AN ISA MILLIONAIRE
1. Make use of your allowances
To reach £1 million as quickly as possible, you will need to use all of your allowance every year. You can save up to £20,000 each year into an Isa.
2. Invest for the long run
When picking investments, it is key to choose ones you are comfortable leaving your money in for a long time. This will cut down on trading costs and allows you to compound any earnings you receive from dividends.
3. Spread your investments
Invest across a range of assets, regions and sectors to diversify the risk you take on. Piling too much money into one stock or fund can prove costly if its price takes a hit.
4. Be consistent
Consistency is key if you want to hit the £1 million mark. Invest each month when you have the money – perhaps directly after pay day – rather than waiting until the end of the tax year to pay it in as a lump sum. This will allow you to compound your returns more quickly.
5. Set targets
Having a goal can help motivate you to keep investing regularly and to focus on the long term. Trying to reach £1 million is a daunting challenge, so set yourself targets along the way to make it feel more achievable. Plan how much you need to contribute and the returns you would need so that you can visualise the process.
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