Time for an update on my ISA progression.
Regular readers will know that if I have a top tip for any UK investor, it’s this: make the most of the ISA tax break, and do it via Stocks & Shares ISAs. Note: definitely not Cash ISAs – saving tax on 1% interest isn’t the way to build your savings pot, whereas saving tax on 6-10% equity returns can make a real difference.
The annual ISA allowance remains £20k per person. I have enough of my savings outside a tax-shelter that I move as much as I can into an ISA every year, for both me and Mrs FvL. I’ve been posting updates annually about this (e.g. here). Touch wood, I am hoping to build my ISA pot into £millions over the next 30 years.
In case you are wondering about whether pensions are a better way to save than ISAs, remember that pensions have a lifetime pot maximum of around £1m before unfriendly taxes apply. If you are about 40 years old and planning to retire at about 70 (or 30, and aiming to retire at 60), then you start to approach the level where your lifetime limit could bite with a pot as ‘small’ as £125k. In contrast there is no limit on how large your ISA pots can grow while remaining tax-free.
We are starting to see more and more investors reach the £1m ISA milestone. It appears there are about 500 such investors in the UK at the moment. I’m not at £1m yet, but I am on track to reach it in a few years’ time, barring any change in government policy and/or market meltdown.
Last year saw disappointing market returns. My own ISA fell slightly before income/contributions, and while Mrs FvL’s ISA rose a little it still left my overall ISA pots down in value before income and contributions.
But while market gains/falls are fairly unpredictable, the portfolio’s dividend stream is much steadier. Thankfully my ISAs generated income of over £20k (a yield of around 4%). That income is entirely tax-free. But rather than withdraw it, I’ve reinvested it – to enable my returns to compound up. This (combined across me + Mrs FvL) income is still less than the taxman’s annual allowance for topping up my account, but the day that the annual allowance is less material than the portfolio’s own performance draws closer.
When I die I’m due to be £2m poorer than it appeared last year
A few days ago I topped up my and Mrs FvL’s ISAs, so my total ISA balance is now around £580,000. It seems hardly no time since (in 2015) I wrote my first ISA blog, with a portfolio of around £330k, and my pot has almost doubled since then. The curve I set out in 2015 is proving surprisingly accurate.
However, the projection for my ‘termination value’ has in fact dropped from £28m to under £26m. How come? Because my life expectancy has fallen from 88 to 85 in the last few years, according to HM’s statistical boffins.
My planning tool suggests I will cross the £1m threshold around year 2022. Of course in the short term, market volatility matters more than the compounding process.
But over the long term investment returns should do their magic. My planner’s median forecast of my ‘termination value’ of £26m, even allowing for inflation, will still leave me with a high quality inheritance tax problem. And there’s a 10% chance of my ISA growing to £66m.
Somehow I doubt those tax breaks will persist that long, but while they do this is working for me.