Can tax-free savers become millionaires?

ISAs allow you to build up a fortune and avoid paying tax on the proceeds

If you had made full use of your tax-free savings allowance every year since personal equity plans (PEPs) were launched in 1987, you could have more than a million locked away from the clutches of the taxman by now.

But you would have only achieved that landmark figure by careful investment – pick the wrong funds or shares and you could be sitting on a substantial loss.

Analysis by number-crunchers at for The Independent shows that investors could have salted away £192,480 by using all of their their tax-free savings allowance in the last 25 years. The current annual limit allowed in an Individual Savings Account (ISA) is £11,280 but it started at just £3,000.

Over that time period that amount of cash invested in the FT-SE 100 would have grown to £514,000. But if it had been invested every year in the Fidelity Special Situations fund it would have grown to £1,160,000 by the end of the last 2011-2012 tax year.

Meanwhile, if you had invested your PEP and ISA allowance every year in Neil Woodford's Invesco Perpetual High Income fund - which has just celebrated its 25th anniversary - you'd be sitting on £990,098, according to calculations by Chelsea Financial Services. So becoming a tax-free millionaire seems simple - just choose the right fund and stick to your guns. But's that's not necessarily the right approach, according to Brian Dennehy of Fund Expert.

"The numbers highlight the importance and power of regular investing," he said. "Investing even a small amount regularly is not only a good savings habit, but your portfolio benefits from the positive effects of pound cost averaging and the power of compounding.

"But I wouldn't recommend an 'invest and forget' approach - the key is to be in the right fund. If you are the rewards can be huge. But investors should review their holdings regularly."

Anecdotally it's reckoned there may only be 30 ISA millionaires, and those that have made it are those who have been prepared to make regular changes to their holdings rather than sticking with potentially losing investments.

Tom Stevenson, investment director at Fidelity, puts it: "If you can accept the higher volatility of shares when compared to cash savings, the returns from stock market investing over time can be considerable. Starting early really can make a big difference – it gives your money more time to grow in the market and to benefit from the magic of compounding."

Darius McDermott of Chelsea Financial Services advises those looking to build up a tax-free fortune: "To become an ISA millionaire, invest every year, don't over- diversify, reinvest dividends, and review at least once a year if not twice."

The other key about ISAs, of course, is their tax-free nature. There's no capital gains tax due on your hopefully growing fortune.

"ISAs are a fantastic use-it-or-lose-it tax perk," pointed out Mr Stevenson. "That's why they're popular with investors who understand the powerful impact avoiding further income and capital gains tax can have on their total return."

Brian Dennehy adds: "More than anything the ISA millionaire numbers show the benefits of protecting your capital within an ISA – these capital gains are lining your pockets and not the taxman's!"

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
Arts and Entertainment
Lou Reed distorted the truth about his upbringing, and since his death in 2013, biographers and memoirists have added to the myths
musicThe truth about Lou Reed's upbringing beyond the biographers' and memoirists' myths
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the Apple Watch for you? Well, it depends if you want for the fitness tech, or the style
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

    Who's monitoring the outsourced NHS services?

    A report finds that private firms are not being properly assessed for their quality of care
    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

    The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
    How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

    How do Greeks feel about Syriza?

    Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
    From Iraq to Libya and Syria: The wars that come back to haunt us

    The wars that come back to haunt us

    David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
    Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

    Too busy to surf? Head to The Pool

    A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
    Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

    UK's Major Tum to blast off on a spice odyssey

    Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
    John Harrison's 'longitude' clock sets new record - 300 years on

    ‘Longitude’ clock sets new record - 300 years on

    Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
    Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

    Let the propaganda wars begin - again

    'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
    Why Japan's incredible long-distance runners will never win the London Marathon

    Japan's incredible long-distance runners

    Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
    Why does Tom Drury remain the greatest writer you've never heard of?

    Tom Drury: The quiet American

    His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
    You should judge a person by how they peel a potato

    You should judge a person by how they peel a potato

    Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
    Beige is back: The drab car colours of the 1970s are proving popular again

    Beige to the future

    Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
    Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

    Bill Granger cooks with fresh cheeses

    More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
    Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

    Shay Given: 'This FA Cup run has been wonderful'

    The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
    Timeless drama of Championship race in league of its own - Michael Calvin

    Michael Calvin's Last Word

    Timeless drama of Championship race in league of its own