Secrets of the ISA millionaires

Key takeaways:

• Start early and you can build a sizeable pot with lower monthly contributions at the beginning
• Set out a feasible long-term plan for how you want to save.
• Factor in costs related to investing and extra expense you might have to minimise drag

Wouldn’t it be great to become an ISA millionaire and unlock the door to financial freedom?

Recent government data reveals that there are now 5,000 ISA millionaires in the UK, with the top 25 sitting on mind-blowing average wealth of nearly £9 million each. That’s enough to buy around 30 Ferraris with more than £1 million to spare!

Reaching these heady heights is impressive and it’s a testament to the amazing power of investment compounding. But is it possible for ordinary, everyday investors to reach ISA millionaire status?

Let’s look at the numbers and explore what it takes to become an ISA millionaire.

How much do you need to invest?

It’s no secret that reaching ISA millionaire status is far easier when you start out young. The earlier you begin investing, the less you need to stash away to see outsized returns.

Starting out in your twenties will give your money decades to grow, allowing each contribution to compound over time. For example, a 20-year-old could reach £1 million by retirement by investing £380 each month, assuming a 5% annual growth rate and a 2% increase in contributions each year.

In comparison, a 30-year-old would need to invest £700 each month to reach the same goal, almost double the monthly amount.

In fact, the monthly amount you need to invest to reach £1 million roughly doubles every ten years. So, someone aged 40 would need to stash away £1,400 every month to become an ISA millionaire. Meanwhile, a 50-year-old needs to invest a whopping £3,340 every month.

Here’s a breakdown of how much you would need to invest each month to reach £1 million by age 65, assuming 5% investment growth and a 2% annual increase in contributions.

Remember that this projection is just an illustration. Investments can rise and fall in value and you may get back less than you originally invested.

How much do you need to invest to become an ISA millionaire by retirement?

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Seasoned investors will have spotted an issue here. An issue that means older investors may face a challenge when aiming to reach £1 million.

The £20,000 annual ISA allowance means there is an effective monthly cap of £1,666 on ISA contributions, making it tough for those later in life to reach that £1 million target. Simply put, they may hit a ceiling with their investments.

However, all is not lost. For older investors wanting to reach £1 million, there are other options beyond an ISA. Adding a pension or a general investment account (GIA) to your arsenal can help boost your savings.

Harnessing the benefits of an ISA, pension, and GIA can help older investors build impressive portfolios even if time is tight. 

Seven ISA tips

Starting investing early is key for aspiring millionaires, but it's not the only factor. Here are seven simple additional tips to help you get and stay on track.

‍1) Max out your allowance

When it comes to your ISA allowance, it’s use it or lose it. The allowance is reset each year and, unlike the pension rules, you can’t carry over unused allowances from previous years. Maxing out your investments each year will give you the best chance to hit your long-term goals.

By contributing the entire £20,000 each year, you could reach ISA millionaire status in 26 years, assuming 5% annual investment growth.

2) Divide and conquer

If you want to become an ISA millionaire in record time, doubling your ISA allowance can be a great move. Couples with money to invest can both make use of their ISA allowances, with each person getting their own £20,000 annual limit.

This strategy works especially well if you inherit a windfall. By contributing £20,000 each year into two separate ISAs, you can shield more of your money from the taxman and grow your wealth faster.

3) Focus on long-term growth

Unless you inherit a windfall, there are few shortcuts when it comes to investing. Nevertheless, a disciplined and patient approach can significantly boost your returns by minimising the risk of mistakes.

Using a strategy known as pound cost averaging to make consistent, regular investments can help to smooth out market volatility over time. Instead of trying to outsmart the market, you’ll automatically buy at the average market price, buying more stocks when the market is low and less when it’s high.

4) Don’t dip in

If you want to become an ISA millionaire, then dipping into your pot can make a huge dent in your progress. Every time you take money out, you're not only reducing your wealth but missing out on potential future compound growth.

Even small withdrawals can add up over time, acting as a drag on your financial progress. Withdrawing £2,000 each year for a holiday or to cover bills could mean it takes six years longer for a twenty-year-old to reach ISA millionaire status.

To avoid the need to raid your investments, it’s a good idea to set aside dedicated funds for emergencies. Saving separately for short-term and medium-term costs will help keep your investments on track.

5) Check your fees

We’ve already seen that even a small drag on performance can make a massive difference over time. And another example of this drag is the effect of high investing fees.

Most providers charge a percentage fee based on the size of your portfolio. This means platform fees start to rise as your wealth grows, which can take a significant bite from your returns. Over time, you may end up paying more and more. 

Choosing a low-cost investment platform can help maximise your long-term growth and help keep more of your hard-earned wealth.

6) Protect your wealth from inheritance tax

As your wealth increases, it’s essential to plan ahead when it comes to taxes. This means also considering inheritance tax.

Although using an ISA shields your wealth from capital gains tax and dividend tax, it won’t protect your wealth from inheritance tax. Known as Britain’s most unpopular tax, inheritance tax is charged at 40% on assets you hold when you die. This could include your ISA, depending on the value of assets you’re leaving behind. 

To safeguard your wealth, you might want to think about tax-planning strategies like giving lifetime gifts to loved ones and sorting out a tax-efficient will to make the most of the tax-free threshold on your estate. 

7) Don’t forget inflation

For investors, it’s important to think about inflation and factor it into your long-term plans, especially if retirement is a long way off. If you’re in your twenties, then £1 million won’t have the same purchasing power by the time you retire.

On the plus side, inflation also means that your income is likely to rise, meaning you can hopefully afford to save and invest more over time.

The good news is that gradually increasing your regular investments as your salary rises is one of the most effective ways to mitigate the long-term effects of inflation. Whether you’re aiming for £1 million or a more modest sum, actively managing your investments will help you continue to build wealth and take you one step closer to financial freedom.

Until 5 April 2025, you can earn up to £2,000 worth of free shares when you contribute at least £5,000 to your Freetrade ISA or SIPP.

Annual subscription required. Free share value depends on the amount you contribute per account. See the offer FAQs and terms for further details.

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