A new UK tax year has just begun, and with it a new annual ISA allowance of £20k each. ISAs are an amazing tax-break for investors who are UK taxpayers. I love them, and have a goal to get my ISA portfolio to £1m+. I’ve been posting updates annually about this (e.g. here, and the one before).
Why is being an ISA millionaire cool? The £1m mark is just an arbitrary number, after all – unlike UK pensions which are capped for most of us at £1m. A million quid maintains an allure, even after the ravages of inflation. And sensibly invested it should produce an annual income of £35k-£40k, tax free – whereas a £1m pension’s income is taxable, if it is taken.
Since the government lifted the allowance to £20k per person a few years ago (an un-noticed marriage tax break for wealthy, i.e. mainly Tory, voters), even
ignorant ultra-conservative investors using just Cash ISAs can become ISA millionaire-couples in ‘only’ 25 years. But their £million won’t be worth as much as it would have been when they started, and they won’t benefit from tax-free compounding over the 25 years.
£20k here, £20k there and, pretty soon, you’re talking real money
ISAs in their current form started in 1999, when they replaced other tax-friendly savings arrangements such as PEPS, TESSAs.
Any single person who’d topped up their ISA to the maximum every year since 1999 would have, if they have just topped up their 2018/19 ISA, invested £206k in their ISA. If this money was invested in a low-cost FTSE All Share index tracker, with no withdrawals, it would today be worth around £380k. A married couple who have doubled up the whole way will be sitting on a combined ISA pot of double this, which is over $1m. So, in dollars, a pair of wealthy ISA-loving investors would be ISA millionaires if they have achieved market average returns over the last 19 years.
Being an individual ISA millionaire in pounds is much harder. But if you were saving hard using the PEPs/TESSAs that preceded ISAs, you had a crucial starting advantage. This is one of the ways that the most famous UK ISA millionaire, Lord (John) Lee did it. But if, once ISAs came along, you achieved only average market returns, you’d have had to begun your ISA journey with £187k of savings.
How could people have begun their ISA journey in 1999 with £187k savings? The Capital PEP, which would have been the best vehicle to have used, started in 1987 with an annual allowance of £2.4k. By 1990 it had risen to £6k. But this means the most you could have invested before 1999 was £64.2k.
What were the chances of turning £64k into £187k in 12 years? As it turns out, the chances were very good. The 1991-95 boom saw the FTSE All Share return over 20% per year in four of the five years. So an ‘all in’ PEP investor, achieving average returns, would have had £159k in their ISA account on day 1. Maintaining average returns and continuing to be ‘all in’ would have got them to around £850k today.
In fact, an ‘all in’ investor like John Lee would have only needed to outperform the market by 1% per year in order to cross the £1m threshold, which they would have done in the last 12 months. Outperforming the market by 1% per year is no mean feat, but there are certainly countless UK investors who have done it. Of course, in the recent Brexit-y era, the more of your investments were outside the UK the more you’ll have beaten the UK market.
And, if you start today, and manage to go ‘all in’ with the full £20k allowance into low-fee equities (in a Stocks & Shares ISA, obvs) every year, even assuming no change in the annual ISA allowance, with average returns of 7% per year it would take around 15 years to reach £500k (or a couple to reach £1m), and a further 7 years to reach the cool £1m mark.
Where are all the ISA investors’ yachts?
Of course the basics I’m describing above are rarer than they sound. To be nudging £1m of ISA savings, an individual must have:
- Maxxed out their allowance for thirty years. Thus, be at least 50 years old.
- Not withdrawn anything. Thus, still be working and/or have other investments / income streams.
- Invested everything in equities (or something even better). No major asset class matches equity for long term returns except, in some situations, property. But you can’t invest in property from an ISA.
- Paid low fees. John Lee, for instance, manages his investments himself and is a long term investor, so he has bare minimum fees to pay.
- Achieved at least market performance. This needs either luck or skill. In any case, it almost certainly won’t happen for a sustained period if a third party is managing the funds. And it won’t, by and large, happen in a Cash ISA either – Stocks & Shares ISAs are a must.
This sounds like thousands of people, not millions. Evidently Hargreaves Lansdown – the UK’s biggest financial platform, by some distance – had 168 ISA millionaires last month, up from 12 in 2012. AJ Bell had “almost twenty”. Fidelity probably has somewhere in between. Interactive Investor, which is old by online standards but was only created around the same time as ISAs in 1998, doesn’t publicly talk about having any. In total, it looks to me as if there are fewer than 500 ISA millionaires currently.
Incidentally, you do have to admire the chutzpah of Hargreaves Lansdown’s PR team: it’s wonderful framing by them to highlight “look at the funds our ISA millionaires own”, instead of “watch how much easier it is to become an ISA millionaire if you don’t use Hargreaves Lansdown to invest in funds”, and the numbskull financial press laps it up. The reality is that your best way to become an ISA millionaire, starting from scratch today, would be to go ‘all in’ to something like VWRL, Vanguard’s World Equities ETF – you read it here first.
I am almost surprised that Hargreaves has any ISA millionaires at all, such are their fees. But while the smarter money will mostly avoid Hargreaves, I suspect that Hargreaves outperforms on the wealthy money. No matter how smart you are, if you haven’t been topping your ISA up by at least £7k per year for 20+ years you have practically no chance of being an ISA millionaire today. My hunch is that HL has a high market share of the demographic who have had this sort of money for that long. And for their ‘let the experts do it’ brigade, if they lucked out by over-allocating to Neil Woodford, Anthony Bolton or similar, then they may have outperformed for a decade or more. Such a shame such funds can’t keep it up for longer.
My analysis assumes equities means UK FTSE stocks, and I’ve used the FTSE All Share index as the benchmark. In practice wiser investors would have a more global allocation than that, but that wasn’t easy to do in the 1980s/1990s. Going forward new money would typically be allocated across more than just the UK equity market.
In the meantime, Hargreaves has “hundreds” of investors with £500k+ in their pots. I’m not quite at that level yet myself, as I started late (doh!) and have been achieving roughly market average returns. Within five years, even an average investor in UK equities who’s been paying 1% a year, will likely reach £1m just by remaining fully invested. And if you’re ‘all in’ these days, you’re moving £20k a year into your ISA. Pretty soon, there will be a lot more ISA millionaires. How much longer will the tax break last at that point? Buy now while (ISA) stocks last.