Number of ISA Millionaires Exceeds 4,000: Understanding Your ISA Options

The number of ISA millionaires is sitting at 4,070 as of April 2021 according to the latest figures from HMRC, almost tripling year-on-year from 1,480 in 2019/20.

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The average ISA millionaire pot was £1,397, whilst the top 50 ISA investors have an average of £8,509 in their ISA.

This follows research from the Royal Statistical Society in 2021 that revealed the ISA is on track to create more annual millionaires than the lottery by 2031.

Clearly, the tax-free ISA wrapper – considered one of the most generous tax incentives available to investors in the UK – has the potential to be an extremely valuable tool for building wealth. This may seem surprising when the most-subscribed ISA product, the Cash ISA, is currently offering rates that aren’t even keeping pace with inflation. 

Even following the Bank of England’s (BoE) fourteenth consecutive base rate rise to 5.25%, not all banks have passed on the increasing rates to savers, and those who have are still no match for 6.9% inflation (as of July 2023). 

The highest offering on an easy-access Cash ISA at the time of writing is just 4.43%, whilst you can do slightly better with a fixed Cash ISA product at 5.77%. But both still risk the value of your capital being eroded in real terms. Research from AJ Bell suggested that over the past year, as much as £113 billion may have been wiped off the value of the nation’s savings due to rising inflation.

However, for experienced investors willing to take on more risk in the search for higher target returns, the ISA has much more to offer than the low-yielding, savings-based Cash ISA. 

Though much of the focus for investors has been on the Stocks and Shares ISA in the past, the introduction of the Innovative Finance ISA (IFISA) in 2016 broadened the scope of the ISA wrapper, allowing investors to utilise their annual ISA allowance to invest into alternative assets including property bonds and SME loans.

These IFISA-eligible assets are uncorrelated with both the BoE base rate and the famously volatile equities market, and with tax-free target returns often in excess of 9%, the product has the potential to play a core role within an experienced investor’s portfolio. 

What’s more, it’s estimated that for investors able to maximise their ISA allowance by subscribing the full £20,000 each year, consistent target returns of 7% would be the figure required to join the ISA millionaire club in just over two decades. 

This is thanks to an increasing ISA allowance. According to AJ Bell, today’s ISA millionaires had to achieve annual growth of 14% on maximum ISA contributions, as they were limited to an allowance of £7,000 for the first nine years after the ISA was launched in 1999.

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


Building a diversified ISA portfolio and using the products to their full potential

The latest HMRC data revealed that £144 million was subscribed to IFISAs in 2021/22, up from £92 million the previous year. This signifies investors’ growing confidence in the product.

Meanwhile, the data also reported that the number of Cash ISA subscriptions had fallen in 2021/22, down to 7.14 million from 8 million the year before – a somewhat unsurprising consequence of the rock-bottom Cash ISA rates on offer at that time.

But the Cash ISA still has its place within a diversified ISA portfolio, along with the IFISA and Stocks and Shares ISA. Each product has its own features and risk considerations, and they’re each useful for targeting different investment goals.

The Stocks and Shares ISA has excellent potential for long-term growth (it’s advisable to stay invested for a minimum of five years to allow any falls in value the chance to recover), the IFISA for short- to mid-term growth, and the Cash ISA is crucial for that all-important ‘rainy day’ fund. 

On top of creating a balanced and diversified portfolio, there are steps to take and points to consider to ensure you’re truly making the most of what the ISA wrapper has to offer

Most ISA investors who have reached millionaire status highlight the importance of subscribing the ISA allowance in full each year. Whilst understandably not an option for all investors, it’s a vital consideration for those who are able to. 

Utilising ISA transfers when needed is also crucial. When completed correctly, an ISA transfer can allow you to invest what could be considerably more than your £20,000 annual ISA allowance each tax year.

Enabling you to move funds from one ISA to another without impacting your current year’s ISA allowance, ISA transfers are a valuable tool for ensuring your past allowances continue to meet your investment objectives.


Making the most of your ISA options

Investing in a tax-efficient manner has always been an important factor when looking to maximise potential returns, but the appeal of the tax-free ISA becomes all the more apparent amidst the realisation that becoming an ISA millionaire could be significantly easier than it has been in the past.

When understanding their ISA options and the importance of a diversified ISA portfolio – as well as recognising the benefits of tools such as ISA transfers – experienced investors could be on their way to generating a significant sum within the wrapper.