A freedom of information request to HMRC revealed that the UK had over 2,000 ISA millionaires in 2019, with average holdings of £1,412,000 (it is thought that all those who have surpassed the £1,000,000 mark are stocks and shares ISA holders, rather than cash ISA holders). But how can private investors become part of the millionaires ISA club? Here we outline some tips and approaches that will enable you to optimise your ISA returns in the long run.

Use or lose your ISA annual allowance

Returns or gains on investments held in an ISA are not subject to income tax or capital gains tax. Each adult benefits from an annual ISA allowance of £20,000, which is only available for a given tax year. A couple can contribute £40,000 per year, allowing significant savings to be moved into a tax-free environment over time. According to (provisional) HMRC figures there are almost 3.6 million stocks and shares ISA holders in the UK, but many subscribers don’t use their full annual allowances.

Key investment considerations

The earlier you contribute to an investment ISA, the more time your money has to grow. Paying in at the start of the tax year, rather than at the end, will also help to boost long-term returns. It’s always wise to stick to your investment strategy and avoid the temptation of overtrading to try and time the market. Data from investment firm Cambridge Associates shows that if an investor in the US equity market had missed the best 30 trading days since 1980, it would have lowered their return by around 5% per annum. Excessive fund/provider fees can also significantly hamper investment growth.

Let compounding do the work

Compounding is every investor’s not so secret weapon. The conservative illustration below highlights the ‘snowball effect’ that compounding has on a portfolio over time. If you contributed your maximum allowance each year, and saw average annual returns of 5%, your ISA would be worth over £1,000,000 after 25 years. After 40 years your portfolio would be worth over £2.5 million, against a cumulative contribution of just £800,0000.

Optimising investment returns

Subscribing £20,000 each year, or surpassing the £1,000,000 mark, won’t be possible for every saver. But the effect of compounding over time, and the tax-free benefits of ISAs, mean that you can optimise your investment returns by following simple steps, regardless of your long-term investment horizon and financial goals.

ISAs can form a valuable part of an overall and joined-up financial plan. Lumin can professionally manage your ISA and ensure it is invested in a portfolio that is tailored to match your objectives and risk appetite. To book a free introductory meeting call 03300 564 446, or visit luminwealth.co.uk/contact.