Could you become an Isa millionaire in 20 years?
Isa savers could become millionaires in just 20 years based on historic returns for world stockmarkets.
The calculation is based on the average annual return of 8.3% achieved for the MSCI World Index over the past 25 years. It includes the reinvestment of dividends. It also assumes making the maximum contribution into an Isa, a tax-efficient wrapper for investments, of £20,000 a year.
Past performance, of course, is no guide to future returns. For that reason, we have also modelled additional calculations around the actual expectation expressed by UK investors for stockmarket returns. The Schroders Global Investor Study found British investors expecting a 5% annual return from equities over the next decade.
In this scenario, it would take 25 years to reach £1m.
We have also added a moderate scenario of 4% a year. This was a view recently posited by The Value Perspective, a Schroders blog, based on current valuations.
If the investments grew at 4% per year then it would take 28 years to reach £1m.
The chart below captures each of these scenarios. It also underlines the miracle effect of compounding, where you reinvest the dividend income paid out. It means you can then earn returns on your returns.
Past performance does not offer a guide to future returns, these calculations offer food for thought. This is a example and as such should not be relied upon, and is not guaranteed. This is based on assumptions which may change.
James Rainbow, Co-Head of Intermediary at Schroders, said: “The story of Isas over the last two decades underlines the power of investing. Yes, you’re taking on risk, and the returns are not certain. But if you commit to making regular payments and stick with it, the results can be impressive.”
What is an Isa?
An Isa, or Individual Savings Account, is a tax-efficient account into which anyone over the age of 18 can save up to £20,000 a year and withdraw the proceeds at any time, tax-free.
The holder can choose a cash Isa, which works like a traditional savings account. Or they can take on extra risk and invest their money into financial markets on the hope of achieving better returns, through a stocks & shares Isa.
There are pros and cons to both. If you leave your money in cash then up to £85,000 is protected by the Financial Services Compensation Scheme (FSCS). Cash returns have historically been lower but they provide more assurance. With any investing, your capital is at risk.
Millionaire status achievable
The number of Isa millionaires has vastly expanded in the UK due to the strong performance of markets but also because the annual Isa allowance has increased rapidly. Research by the Telegraph in 2015 suggested there were only around 200 Isa millionaires. One particularly successful investor had a portfolio worth more than £2m. The newspaper recently estimated the number of Isa millionaires to have grown to more than 1,000.
Back in 1999 investors were only allowed to save £7,000 in their Isa. It would have taken at least 31 years, if your investments grew at 8.3%, to become an Isa millionaire had the rules stayed the same.
However, they didn’t. In 2010 the Isa limit rose above £10,000, followed by smaller rises, and then in 2017 it went up to £20,000 per year.
It should also be highlighted that the Isa limit may rise in the future, allowing for larger contributions to be made. Investors should also bear in mind that inflation may erode the buying power of your future savings pot.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.