Do you harbour ambitions of investing your way to a £1million Isa pot – and what would you do with it if you got there?
The lure of financial independence has only gotten stronger for many through the Covid pandemic years and a cool million in tax-free savings sounds like a decent way to achieve it.
So, it’s no surprise that the idea of becoming an Isa millionaire features regularly in the personal finance pages.
What would that £1million get you though, how much would you need to invest and for how long to get there – and is it enough for financial independence?
On this podcast, Georgie Frost, Helen Crane and Simon Lambert discuss building your way to a £1million Isa and how achievable that might be.
Also on the podcast, the team look at what’s happening to mortgage rates and why anyone whose mortgage needs fixing this year should start thinking about it, along with some practical tips of what they could do.
They discuss at Santander’s recently improved 123 account – and whether it’s been bumped up enough to be worth taking.
And finally, the cost of living crisis looms large again: is there anything the government is likely to do to help with the soaring cost of petrol and should you fix your energy bills or stick with the price cap?
The latter is a question on Simon’s mind – as it’s exactly the scenario he is facing as his energy deal ends – he talks us through the numbers and what he will do.
Could you become an Isa millionaire?
The easiest way to become an Isa millionaire is obviously to start with plenty of money – if you can stash the full £20,000 away each year then you will get there much quicker.
Saving your way to being an Isa millionaire in cash would be a tall order. The best easy access cash Isa rate is 0.8 per cent from Swansea BS, at that rate if you salted away your full £20,000 annual allowance as £1,667 per month it would take 42 years to reach £1million.
For someone investing the full £20,000 each year and getting an average 5 per cent annual return it would take 26 years, while with an average 7 per cent return it would take 21 years.
Saving or investing that kind of money is way beyond most people, so it would take them much longer even if they could invest a large monthly sum.
For someone investing £500 a month and getting an average 7 per cent return it would take 40 years to reach £1million.
Meanwhile, if you set a time-based goal, the amount needed to be invested each month with an average 7 per cent return to reach £1million would be £1,920 per month over 20 years, or £820 per month over 30 years.
If you did reach £1million, a 4 per cent withdrawal rate would give you £40,000 per year tax free. The only problem is inflation is likely to have seriously eroded the value of that money by then.
How an Isa works and the tax perks
- You can save or invest up to £20,000 into Isas each tax year.
- If you don’t use this year’s allowance by Tuesday, April 5, you will lose it. Your new allowance kicks in the following day.
- You can save into one of each type of Isa each tax year. This means you can pay into a cash Isa, stocks and shares Isa, innovative finance Isa – and a Lifetime Isa if you are eligible for one. However, the total must not exceed £20,000 and you cannot save into more than one of each type of Isa.
- You do not have to pay tax on interest, capital gains, or dividends earned in an Isa – even if the value of your Isa breaches £1million.
- An Isa is not free from inheritance tax, unless transferred to a spouse or civil partner.