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 FundExpert.co.uk 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
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
    10 best statement lightbulbs

    10 best statement lightbulbs

    Dare to bare with some out-of-the-ordinary illumination
    Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

    Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

    Briton pumped up for dream meeting with world No 1
    Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

    Nick Bollettieri's Wimbledon Files

    It's time for big John Isner to produce the goods to go with his thumping serve
    Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

    Dustin Brown

    Who is the German player that knocked Nadal out of Wimbeldon 2015?
    Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

    Damien Martyn: 'England are fired up again, just like in 2005...'

    Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test