The number of ISA millionaires is growing at a considerable rate, and it shows that Stocks and Shares Individual Savings Accounts (ISA) are a lucrative strategy for UK adults who are willing to invest rather than save.
For the 2022 to 2023 tax year, there were 3,180 ISA millionaires, representing a significant increase from the 1,030 recorded just three years prior and the 570 ISA account holders with over £1 million eight years ago.
Although it’s difficult to source precisely what ISA subscribers have done to accumulate more than £1 million in their Individual Savings Accounts, we can be reasonably confident that the vast majority of ISA millionaires are investors, as opposed to savers.
There are several different types of ISA available for UK adults and children alike. The most popular are Cash ISAs and Stocks and Shares ISAs. Both of these savings accounts allow tax-free allowances of up to £20,000 each year, meaning that it’s possible to grow your wealth without having to pay capital gains tax (CGT) on any of your earnings.
Lifetime ISAs are also a common form of ISA, but their £4,000 annual tax-free limit makes them more restrictive for significant wealth building.
The 2022 to 2023 tax year saw 7.9 million subscriptions to Cash ISAs and 3.8 million to Stocks and Shares ISAs. However, this 63% preference for the fixed savings of Cash ISAs can potentially impede your ability to reach millionaire status with your savings account.
So, should more UK adults build their risk appetite and turn to investing their wealth? History shows that Stocks and Shares ISAs can be more rewarding than their cash counterparts, but it really depends on your risk appetite.
The Road to £1 Million
The tax-free £20,000 allowances of both Cash and Stocks and Shares ISAs are their biggest asset for their subscribers, but also an obstacle when it comes to building accounts worth more than £1 million over time.
It also means that Cash ISA holders would have required a fixed rate of around 8% since 1989, when annual allowances were at £3,000, to reach £1 million today. Because Cash ISA rates are closely aligned with the Bank of England’s base interest rate, it can be extremely difficult to reach anywhere near an 8% AER.
Stocks and Shares, on the other hand, have consistently achieved an average 9.64% rate of return over the past decade in comparison to the 1.21% offered, on average, by Cash ISAs.
Importantly, S&S ISA investors can benefit from compounded returns, which means that any profit they make can be reinvested within their accounts to achieve far higher returns over time.
It’s this that’s helped more than 3,000 ISA subscribers to become millionaires in the United Kingdom, along with the stock-picking acumen of account managers.
Dividends are Tax-Free
Another significant advantage for Stocks and Shares ISA holders is that dividend payouts aren’t liable for any taxation. This means that you can grow your ISA more reliably without having to use up the entirety of your annual dividend allowance, which stands at £500 at the time of writing.
By adding dividend-paying stocks to your S&S ISA portfolio, you can build your portfolio using your windfalls and compound the overall amount of money that you’re capable of investing over time.
This means that you don’t necessarily have to pick risky stocks in a bid to grow your ISA and can instead add resilient firms that have a strong history of dividend payouts to boost your earnings.
Looking to the Long-Term
ISA millionaires are characterised by adopting a long-term mindset for their portfolios. While everybody wants to see results early on, Stocks and Shares ISAs are built to hold long into the future for the best results.
This means that it’s possible to become an ISA millionaire without having to resort to day trading or reacting quickly to market volatility, and instead, simply building a portfolio that you believe is strong enough to continue growing into the future.
According to Hargreaves Lansdown, holding your investments in shares helps to block out the short-term noise and rarely causes investors to experience losses over time. HL data shows that over 100 years of available data, 91% of 10-year periods have shown investments in shares have outperformed holding cash, and this puts Stocks and Shares ISAs in a strong position to out-earn their Cash counterparts, even with attractive fixed earnings on offer.
Matching Your Financial Goals
Fundamentally, finding the best ISA boils down to your individual needs and financial goals. There’s no reason to focus on becoming an ISA millionaire if you’re simply looking to save your spare funds each month for a reliable rainy day fund.
Take a look at your financial wants and needs to assess whether a Cash ISA or Stocks and Shares ISA helps you to achieve your goals. In finding a strategy that’s best for you, it’s possible to build your financial security long into the future.
