You could build a nest egg of over £1m in just 26 years (Source: Getty Images)
No one knows exactly how many Isa millionaires there are. Stockbroker Brewin Dolphin
has in the past claimed that around 15 of its clients have over £1m of savings sheltered from the taxman in an Isa wrapper. But the number is sure to increase as the effect of the Nisa’s higher annual allowance takes hold over the coming years.
Calculations by online wealth manager Nutmeg found that a saver making full use of the new £15,000 allowance every year from 2014 could build a nest egg of over £1m in just 26 years, assuming annual returns of 5 per cent (after fees) and an annual 2 per cent increase in the allowance. Under the old system, reaching £1m would have taken almost 30 years. But reaching this elusive goal requires serious discipline. Here are some of the top tips for becoming a Nisa millionaire.
USE IT OR LOSE IT
Perhaps the most crucial piece of advice is to never miss a contribution. As with the old Isa, the new scheme is run on a “use it or lose it” basis. Missed contributions cannot be carried over from one year to the next: £1,000 of foregone investments is £1,000 of tax-free savings gone for good.
And the tax-free benefits can be considerable. Brewin Dolphin estimates that savings on capital gains tax over a 30-year period for an investor maximising the new, higher allowance (and achieving a 5 per cent return) would total £270,408. To avoid missing out on these huge benefits, it’s vital to maximise your contribution every year.
The assumption of 5 per cent annual returns is conservative, according to Guy Foster, Brewin Dolphin’s head of portfolio strategy. But even this rate of return would be near-impossible to achieve if you stuck to just cash or bonds.
As Tom Stevenson of Fidelity argues, over long time horizons, the number of years in which equities outperform cash is very close to 100 per cent. Research backs this up. In his book, Stocks for the Long Run, renowned financial economist Jeremy Siegel looked at stock performance going back almost 200 years, finding that the average expected return on equities was between 6 and 7 per cent per year after inflation. Researchers at New York University’s Stern Business School, meanwhile, found that the average annual return on US Treasury bills between 1928 and 2013 was just 3.57 per cent. Over long periods (and becoming a Nisa millionaire requires patience), stocks have always won.
But even within the world of equities, the variety of risk-return profiles on offer can be enormous. And according to Rebecca O’Keeffe, head of investment at Interactive Investor, “long-term investors typically take on less risk than they should.”
Britain’s first Isa millionaire Lord Lee, who was also a government minister under Margaret Thatcher, has said that he researched individual stocks, mainly UK small-caps with growth potential and rising dividends. But Stevenson says that not everybody should jump straight into one-by-one stock picking. Buying funds that focus on fast-growing market segments can help diversify without sacrificing the chance for rapid capital growth.