The number of annual ISA millionaires is expected to soar – experienced investors must be aware of their ISA options

By Jo Bentham15th November 2021

Research from the Royal Statistical Society, commissioned by financial comparison website InvestingReviews, has revealed that the ever-popular ISA is on track to create more annual millionaires than the lottery by 2031.

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At present, the lottery creates just over 300 millionaires per year, but by 2031, the annual number of new ISA millionaires is forecasted to average 322.

This may seem surprising at a time when inflation is running at a decade high of 4.2% (as of October 2021) whilst the Cash ISA is offering historically low interest rates, resulting in the risk that investors holding cash will see the value of their funds eroded over the long-term. 

But today, the ISA is much more than the low-yielding, savings-based Cash ISA. The Stocks and Shares ISA and Innovative Finance ISA (IFISA) offer experienced investors with the appropriate risk appetite opportunities to target inflation-beating returns – a consideration that is crucial for investors looking for an ISA product with growth potential amidst an all-time low interest rate environment. 

Whilst in the past much focus for investors has been centered around the Stocks and Shares ISA – a product which itself has produced 1,365 ISA millionaires over three investment platforms – the introduction of the IFISA in April 2016 broadened the scope of the ISA wrapper to a significant degree. 

Uncorrelated with the volatile equities market and the Bank of England base rate, the IFISA has brought a selection of eligible alternative investments under the wrapper, from property bonds through to SME loans. 

With target returns often in excess of 5% – typically between 6% and 8% for the property-backed IFISA in particular – and opportunities to hold increasingly popular alternative assets, it’s clear the IFISA could play an important role in an experienced investor’s ISA portfolio. 

And, for experienced investors able to contribute the full £20,000 ISA allowance each year, it is estimated that consistent target returns of 7% would be the figure needed to join the ISA millionaire club in just over two decades. 

This number has been spurred by an increasing ISA allowance, as today’s ISA millionaires had to achieve annual growth of 14% on maximum ISA contributions according to AJ Bell, due to being limited to an allowance of just £7,000 for the first nine years following the launch of the ISA. 

As a result, it’s technically easier than ever to reach the £1 million milestone with an ISA, thanks to a generous ISA allowance and the introduction of a range of products.

 

Building a diversified ISA portfolio and maximising your ISA allowance are key

One of the key principles of investing is to build a balanced, diversified portfolio – and this is particularly crucial for experienced investors looking to maximise their potential ISA returns. 

The Stocks and Shares ISA has attractive long-term growth potential, but the stock market can be extremely volatile, as witnessed throughout the Coronavirus pandemic. 

On the other hand, as mentioned, the IFISA and its alternative assets are uncorrelated with the fluctuations of the equities market, and the property-backed IFISA specifically has proven resilient during Covid-19 as the UK’s housing market has showcased exceptional performance due to heightened demand and a “race for space”. 

Therefore, there is significant value in considering splitting your ISA allowance across both products – which is possible as you are able to contribute to more than one ISA each tax year – reaping the benefits of each and ensuring all of your eggs aren’t in one basket. 

Moreover, when asked for tips on becoming an ISA millionaire, most investors who have reached the milestone urge the importance of subscribing the ISA allowance in full each tax year. Whilst understandably not an option for all investors, it’s a vital consideration for those who are able to. 

In addition, ISA transfers can be a valuable tool when searching for methods of both maximising your ISA allowance and ensuring your ISA portfolio is meeting your all-important investment objectives. 

An ISA transfer offers experienced investors opportunities to contribute what could be substantially more than the £20,000 allowance each year, as ISA transfers are not governed by the ISA allowance. 

Investors should be assessing their ISA portfolio on a regular basis to determine whether their goals are being met. In the event they are not, transferring funds to a different product could be a key consideration for those wanting to ensure their ISA allowance is being used to its full potential.

 

Understanding how to make the most of your ISA options

Investing in a tax-efficient manner is more important than ever due to soaring inflation and barely above zero interest rates, but the lure of the ISA becomes even more apparent amidst the revelation that becoming an ISA millionaire could be significantly easier than it has been in the past. 

Whilst there are no guarantees with the investment-based IFISA and Stocks and Shares ISA, it is clear they offer experienced investors ample opportunities to target attractive rates and build a well balanced ISA portfolio when used in conjunction with one another. 

With the addition of understanding how to fully maximise the annual ISA allowance and the benefits of facilities such as ISA transfers, experienced investors with knowledge of their ISA options could be on their way to generating a significant sum within the wrapper.