How many ISA millionaires are there?

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.

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An alternative, rational UK budget

The Tory government’s budget is due this week. As is the custom, the chancellor will stand up and propose what he will argue is the best thing for the UK economy. Numerous other customs abound, including the privilege of having an alcoholic drink to ‘steady the nerves’ during the speech.

In reality any chancellor’s proposals have little to do with the right thing for the economy. They are rather what he/she believes are best for his/her political party and its electoral prospects at the next election. In this case the Tory chancellor Philip Hammond is under unusual pressure to ‘go big and bold’, ‘fix the housing crisis’, and so forth – none of which has much to do with the actual needs of the UK economy, but rather the political predicament the Tories find themselves in amidst the chaos of Brexit.

So, in the absence of a bipartisan budget from anybody else, FIREvLondon hereby humbly submits its proposal for a rational budget – designed purely from the point of view of the long term benefit to the UK economy and its citizens.

A fiscally neutral budget

Unfortunately FIREvLondon’s financial resources do not extend to a detailed model of the UK economy. This is just as well because, almost unnoticed, the UK’s enormous fiscal deficit (the delta between government receipts and government spending) has in fact shrunk significantly since its 2009 peak of >10%, and is now at the decidedly modest level of £48bn. £48bn, “decidedly modest”?! you shriek. In fact £48bn represents around 2.5% of GDP. Provided the economy grows, in nominal terms, by more than 2.5%, then the debt will in fact shrink as a proportion of GDP.

There is an argument that with government debt at c.80% of GDP the priority should be to shrink the debt faster. I have sympathy for this argument – especially when the last chancellor but one preached that a national debt level of 40% was a ‘golden’ ceiling above which we must never go – but I am not going to make it here.

So, my aim is to leave the net fiscal deficit unchanged. I am also going to assume no significant change in government borrowing costs; were interest rates to rise significantly my spending projections would increase alarmingly, but for the purpose of tax/spending policy I think it is reasonable to assume no change in medium/long term borrowing costs.

Right now our tax code is riddled with absurdities. For instance

  • We tax jobs. At about 25% per job. Except the really high paying jobs which we tax at about half this level. You can’t make this stuff up.
  • We tax mobility. Via stamp duty. Via high property prices, planning laws etc.
  • We subsidise the rich. Via private schools having VAT exemptions. Via pension tax relief. Via Right to Buy, Help to Buy, etc. Via non-dom. Via EIS. Via carried interest.
  • We subsidise property. Every which way you look. Whereas in fact property is a much more natural thing to tax than people – it can’t move overseas, for starters.

My budget will take steps to start restoring common sense and rational thinking to the tax rates. Here goes.

Taxes on people (living and working)

Taxes on people who live and work are the highest. They should in fact be the lowest.

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Investing in Unicorns

I’ve just discovered a unicorn. Or more to the point, I’ve just learnt that one of my angel investments has become a unicorn. A real one!

Unicorns – myths and reality

What am I going on about, you might be asking? In the investing world a Unicorn is a common nickname for a startup business that reaches a valuation of $1bn+. That’s the type of unicorn I’m talking about. There are dozens, but not hundreds, of unicorns in the world. In the UK the better known ones include Asos, Deliveroo, FarFetch, Funding Circle, Transferwise and Zoopla.

But many so-called Unicorns are not ‘real ones’, to my mind. How come? Because the valuations are often something of a fantasy, and concocted out of funny structured notes for the benefit of the media/credulous staff/others, rather than being a true reflection of the value of the company. I do speak from some experience here, sadly.

For me a ‘real’ Unicorn is one where investors are able to sell shares at a Unicorn valuation – i.e. a price which values the company at $1bn+. Asos and Zoopla pass this test – both are now public companies worth >>$1bn, and their investors have full liquidity. Deliveroo does not pass this test; the large sums being invested at $1bn+ valuations represent money going in to the company, but (to the best of my knowledge) existing investors have not had an opportunity to sell any holdings and, if they did, it would be at a significant discount to the headline valuation.

When is it wrong to take a 40x profit?

So, in my case I received one of those rare but delicious emails this week telling me that I have an opportunity to sell my shares in an angel investment that I made around 10 years ago, and sell them at a significant profit. The total valuation at the offer price is a smidgeon over £1bn. For the record I bought shares at a little over £10/share and can now sell them at £400/share, so this is almost a 40x gain. Happy days! I’ve held these shares so long that the annual rate of return is not as high as you’d think, but it’s around a very respectable 40% p.a.

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