Do you ever dream of being a millionaire? It’s reality rather than fantasy for a growing number of AJ Bell customers and achieving this goal isn’t dependent on winning the lottery.
It’s not easy to achieve, but it can be done through determination, regular contributions and achieving positive investment returns.
What is an ISA millionaire?
Being an ISA millionaire means having at least £1 million worth of assets in an individual savings account (ISA) such as shares, funds and bonds. You don’t have to pay any tax on the gains you make from savings or investments in the account or on any income you receive from these investments.
Our learn hub has useful information on ISAs and how to use them.
How to become an ISA millionaire
Investors can put up to £20,000 into a Stocks & Shares ISA each year. Investing the full amount at the start of each tax year and achieving an annual 7% total return through either capital growth, dividends or both would mean you hit the £1 million ISA jackpot after 22 years, assuming the allowance doesn’t change. It means the ISA millionaires of the future could be more plentiful, and younger.
Indeed, the youngest ISA millionaire with AJ Bell is just 36 years old which should give encouragement to anyone squirreling away as much as they can into their ISA to achieve a seven-digit figure.
Top tips for your ISA millionaire journey
It’s good to have a goal when you invest as it acts as an incentive along the way. For those looking to hit the jackpot and become an ISA millionaire, the journey might take a while but the path you follow can be similar to those aiming for a smaller target.
1. Start as early as you can
Time in the market is important, not just so you can ride the market ups and downs but also to let your wealth build up.
Not everyone can afford to invest the full £20,000 ISA allowance each year, particularly younger people who might be on a lower salary. The trick is to start as early as possible with what you can afford to invest. Increase your contributions as you get older and hopefully earn more money.
2. Maximise your contributions
Try and invest as much as you can each month once you’re sure all the essentials are covered. Create a budget so you can pay bills in full and clear any expensive debt, such as personal loans or credit cards charging double-digit interest rates. The remaining money can be used to fund your lifestyle and to top up your ISA.
Little sacrifices along the way could help you hit your ISA goal quicker. You should also consider increasing the amount you invest every time you get a pay rise.
3. Be consistent with contributions
Ask a personal trainer for advice on getting fit and they will inevitably say it is down to the consistency of your programme. Keep going to gym to develop those muscles and technique and the results will shine through. Studying for an exam follows a similar approach – regular revision means the information sticks in your mind and helps you on the big day when do the final test.
The same principles apply to investing. Feeding your account on a regular basis means you get into the habit of squirreling money away for your future. After a while you get accustomed to that money going into your ISA that you may not even think about alternative uses for it, such as going shopping or down the pub with your friends.
4. Keep an eye on costs and charges
Costs can add up over time and eat into your returns. Try not to fiddle too much with your portfolio as trading in and out of stocks, funds and bonds incurs transaction charges.
It is important to be patient with investing, especially for someone hoping to be an ISA millionaire as the journey to build up this wealth could last for decades.
5. Spread your risks
Having a diversified portfolio is good practice for any investor, including those aspiring to be ISA millionaires.
If something goes wrong with one of your holdings, you’ve got the rest of your portfolio to hopefully act as a cushion to minimise the pain.
Diversification can involve investing in different industry sectors, geographies and asset types. For example, a diversified portfolio might have exposure to shares, funds and bonds from around the world.
6. The benefits of reinvesting dividends
Companies and funds often pay dividends every three to six months. Think of these as rewards for taking the risk of owning their shares or fund units. While it can be tempting to pocket that income stream to spend on yourself, history suggests one of the biggest contributors to investment returns is reinvesting dividends.
By using the dividend cash to buy more shares or fund units, you are effectively increasing your ownership for free. You’ll own more shares or fund units the next time there is a dividend payment, and hopefully collect an even bigger amount of dividend money.
This concept is known as compounding and is a way of supercharging your journey to becoming an ISA millionaire.
Do you need to use a certain type of ISA?
A Stocks and shares ISA is the logical place to invest if you are looking to take advantage of the £20,000 annual allowance in your quest to become an ISA millionaire. However, there is no reason you couldn’t use a Lifetime ISA in conjunction with a Stocks and shares ISA, as long as you understand the restrictions on the Lifetime ISA.
Anyone eighteen or older can contribute up to £4,000 a year into a Lifetime ISA and the government will pay an extra 25% on top as a bonus, up to the age of 50. It would take a long time and/or out-of-the-ordinary investment returns to become a millionaire purely with this type of ISA due to the contribution limits. Those aged less than 60 also have to pay a 25% penalty charge on withdrawals unless the money goes towards buying their first home.
How do AJ Bell’s ISA millionaires invest?
Today’s ISA millionaires have shown a preference for investing in individual shares rather than funds, with 75% of their portfolios sitting in stocks.
Those with larger amounts in their ISA may be better placed to take the higher risks associated with investing in individual equities and have a big enough pool of assets to diversify appropriately.
Big blue-chip names like Shell, Lloyds and GSK are the most popular stocks with AJ Bell customers who are an ISA millionaire. US-listed tech giants including Nvidia and Microsoft also feature in portfolios but far more have large cap dividend-paying stocks from the UK market than overseas-listed stocks which pay little or no income to shareholders.
This trend could reflect how the average age of AJ Bell’s ISA millionaires is 72 so many customers may be in retirement and want their investments to generate an income. If a £1 million portfolio yielding 4% generates an income of £40,000 a year, this could be a comfy retirement, especially when you add in state and private pensions.
The number of AJ Bell’s ISA millionaires has more than doubled over the past three years. That is despite rising interest rates causing headwinds for equity and bond markets.
Investment trusts are more popular than actively managed open-ended funds such as unit trusts. Of those holding investment trusts, twice as many have an investment in Scottish Mortgage than the second most popular vehicle, City of London.
Passive investments, namely tracker funds and ETFs, also feature in ISA millionaire portfolios, showing that simply tracking the market rather than seeking to outperform can still be a way to build up wealth.
Top ten popular funds, investment trusts and shares with ISA millionaires
Source: AJ Bell, based on AJ Bell customers with more than £1 million in an ISA. Data as of December 2023
An AJ Bell Stocks and shares ISA is an easy, efficient and tax-free way to invest - so more of what you make stays in your pocket.
Choose from a wide range of investments including shares, funds, investment trusts and ETFs.
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