ISAs are often considered a good method of saving or investing, and can be even more beneficial in the long run. Express.co.uk spoke to James Norton, Head of Financial Planners at Vanguard UK, who discussed the idea of ISA “millionaires”.
Mr Norton said many people would like to focus on hitting £1m as that is often a long-standing target, as well as a round number.
It may be more doable than people think, although it will take a lot of work to stay on track.
Mr. Norton explained: “I assumed a relatively modest return of five per cent each year, broadly in line with return expectations at this time.
“If you got a five per cent return and put £20,000 into your ISA, which is the current annual limit, it would take just over 25 years to reach £1million.
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“You’re going to have to invest an extra £20,000 to reach your goal, but you can still do it for growth.”
There is, however, a stark change when you compare this to an expensive or expensive fund which Mr Norton says could easily cost 1.75% or even more.
He added: “If you take a market return of 5% and a cost of 1.75%, your return will only be 3.25%.
“When it’s your return, it will take you around 30 years to reach £1m.
“That’s another four years of contributions, another £80,000 to reach the goal you want.”
As a result, Mr Norton said low-cost investors would have reached their £1 million four years earlier.
He said: “If you invested between £52,000 and £20,000 in your ISA and £32,000 in your pension, it would only take you 12 years to reach £1million.
“If you earn a substantial amount, you can get there pretty quickly.
“It shows how well a pension and the ISA can work together to help people.”
Mr Norton acknowledged that this option may not be for everyone, but stressed the importance of taking action if it is an overarching goal.
The expert said becoming a “millionaire” in this way is all about the power of compounding.
He explained, “The composition is really very beneficial in the long run. You don’t really see or feel it for the first few years, but over time you definitely do.
“In the first year you could get a return of £1,000 which is 5% of £20,000. But if you do this for 10 years it will be worth £250,000 and on that the interest in that year will be around £12,500.
“If you left it for 15 years it would be £450,000, and the compounding part would be £21,500 – more than your ISA allowance to start with!
“It’s suddenly a lot of money to reckon with. If you are disciplined, your returns can skyrocket. It starts slow and then it’s like a snowball picking up speed.