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How you can become an ISA millionaire in 20 years

Alan Oscroft

With this year’s ISA deadline coming up in April and a whole new investing allowance of £20,000 coming our way for the 2018-19 tax year, how much do you think you might accumulate? Do you think a million pounds is out of the question?

You might be surprised to learn that there are estimated to be close to 1,000 investors in the UK who have accumulated a million or more in their ISA accounts, most of whom started out investing in the earlier PEP (Personal Equity Plan) scheme. 

The PEP was introduced in the 1986 budget, so investors have had a maximum of 32 years to reach the million milestone. But seeing as some are even multimillionaires now, getting there in 20 years is feasible, especially as a couple can invest up to £40,000 per year. Who are these super investors and how did they get where they are?

The millionaires

One, Balbir Bagria, managed to retired at the age of 39 and he and his wife stopped adding new cash to their ISAs in the year 2000, achieving multimillionaire status in less than 15 years. Mr Bagria’s investment performance has been nothing less than stellar, as he achieved an annualised return of around 25% via a carefully chosen portfolio of around 10 to 15 stocks — that’s way better than even Warren Buffett has managed over the same period.

But you don’t need to beat Warren Buffett to do it. John (now Lord) Lee became the UK’s first known ISA millionaire back in 2003, just 17 years after PEPs were introduced — and his ISA now holds several million pounds in shares. Interestingly, Lord Lee also went for a limited portfolio of around 10 stocks, but does he have any other secrets?

Never taking any anything out and always investing dividend cash in new shares is a key part of his strategy. He also aims to hold a share for at least five years, avoids big gambles, and only invests in consistently profitable companies whose businesses he understands.

Which shares do ISA millionaires typically choose?

Online broker Hargreaves Lansdown reckons it has more than 150 millionaires among its ISA investors, and you might be surprised to learn that they haven’t relied on hitting ‘get rich quick’ startups or fashionable growth stocks.

No, the top 10 stocks held by the firm’s ISA millionaires are Aviva, BP, GlaxoSmithKline, Legal & General, Lloyds Banking Group, National Grid, Rio Tinto, Royal Dutch Shell, Unilever and Vodafone — all FTSE 100 giants, and all big Foolish favourites.

Returns

If you’re starting today, what would you realistically need to achieve to make a million in 20 years? Let’s assume the current £20,000 limit will continue — hopefully it will rise with inflation, but we’ll stick to 2018 prices.

If you can use up your entire ISA allowance of £20,000 each year for the next 20 years, spread out in monthly instalments of £1,667, you’d need to achieve a return of 8.4% per year to reach the magic million mark. Is that really possible? As it happens, that’s actually slightly less than the average total return of the FTSE All Share index over the past 30 years, so the answer is a clear yes.

Most people don’t have that amount of cash spare to invest every month, but if you invest the most you can manage and leave it there for the long term, you could end up a very happy retiree.

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Alan Oscroft owns shares of Aviva and Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended BP, Hargreaves Lansdown, Lloyds Banking Group, and Royal Dutch Shell. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.