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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to our latest On The Money episode, which is a weekly look on how to make the most out of your savings and investments. Joining me today is Craig Rickman, who is Interactive Investors personal finance editor. Craig, welcome back to the podcast.
Craig Rickman:Thank you very much for having me back, Kyle.
Kyle Caldwell:So, Craig, we're gonna focus this episode on ISA millionaires. How realistic it is to become one? How many ISA millionaires we have at Interactive Investor? And then we're gonna look at the types of investments that are the most popular with ISA millionaires. To kick off, how easy is it to become one?
Kyle Caldwell:And before the podcast, obviously, chatted and came up with an agenda. And I think you've looked at some statistics to show if you filled the ISO allowance every single year since the 04/06/1999 to today, then you then you'd have quite a sizable pot without any investment growth.
Craig Rickman:Yes. That seems like a really good place to start. So for those watching on YouTube, we shall share a graphic on the screen. So if you've maxed out your ICER allowance every year from when the product was launched in April 1999, you could have paid in a total of £346,560. So that's up until the current tax year, ends on, yeah, the April 5.
Craig Rickman:We should note though that before ISAs, we had personal equity plans which were introduced in 1987 and ran up until ISAs. So ISAs have effectively replaced them and PEPs as they were known. All PEPs became ISAs at some point. That happened by 2008. So effectively, you could invest in sort of an ISA wrapper since the late eighties.
Craig Rickman:So, you know, for for coming up to forty years. So these ran from 1987 to 1999. They're the product, the tax wrapper that stocks and shares ISAs essentially replaced, and by 2008, all remaining personal equity plans or PEPs as they're known or as they were known, were merged into ISAs. So effectively, you've been able to invest in an ISA wrapper since the late eighties, so coming up to forty years. And if you add in the total possible PEP contributions, the total rises to £434,760.
Craig Rickman:So a significant sum.
Kyle Caldwell:And in terms of how realistic is it to become an ice millionaire, I think the first thing I'd say is don't become too sort of hung up on it. I think, you know, if you if you can invest as much as you can in a given tax year and you have a decent amount of investment growth over time, then compounds and will work its magic. And that's when investment retains themselves, generate future gains. So I think even more modest sums can turn into a very significant sum over time. However, I did do some number crunching to look at.
Kyle Caldwell:If you if you started with £10,000 and then you invested a monthly sum of a £100 and you then had an annual return of 6%, which is not unreasonable. That is broadly what The UK stock market has given you in its history, then it would take sixty years to reach that £1,000,000 target. Now if you're if you're 21, you know, even if you start young, you know, that means that you'd be 81 by the time you become an IC millionaire. So I think if you do become an IC millionaire and we do have a small but not insignificant number of customers that are IC millionaires, I think it's a really impressive achievement. And we'll come on to it a bit more later on.
Kyle Caldwell:But I do think to get there, you'd have to have maximized the allowance in most years, if not all, and also had some very impressive investment growth as well.
Craig Rickman:Yeah. I think you've sort of summed up perfectly there. It's not out of reach for people, but it really is a very impressive and and lofty achievement, primarily because or one of the reasons is you are restricted on what you can pay into ISAs every year. It's £20,000 at the moment. That's the ISA limit.
Craig Rickman:But going back over the years, it's been a lot smaller. So when ISAs were first launched, the most you could put in was was £7,000. You know, that's that probably would have felt a bigger sum at the time for for people due to inflation. But still, you've you know, you would have had to in order to become an ISO millionaire for those who are ISO millionaires now, then using your allowance every year and like you say, benefiting from the the superpower that is compounding compounding returns, you know, that's that that that that's the best way to sort of to help you get there.
Kyle Caldwell:And going back to the example that I've just given. So if you upped your contributions and you had that same level of investment growth, then you will get there earlier. So for example, so if you doubled those monthly payments to £200 and you invested an initial lump sum of £10,000 and you had that 6% annual return, then that will cut it down from sixty years to fifty two years. If you tripled your contributions to £300 a month, then that would reduce that further to forty six years. However, I do think while adjusting the monthly retains does reduce the length of time it takes to become an isomillionaire, I do think the most important part of the equation is the annual returns.
Kyle Caldwell:And I looked at assuming you had annual returns of 8% rather than 6%. And in the same example, you had £10,000 lump sum, a £100 a month going in, then it would take forty seven years as opposed to six years to reach that magic number. And then I do think 10 returns a year is not is not realistic. But say if you did achieve that, then it would take you thirty nine years. Right.
Kyle Caldwell:So I so I do think it is the it's a it's a mixture. I think the the key ingredients are the amount you put in, but also a very important part of the equation is what the actual investment returns have been. You know, those small differences in terms of the percentage returns can make a huge difference over time, and that is also down to compounding.
Craig Rickman:Yeah. Yeah. I guess another aspect as well is resisting the urge to to dip into your pot as as well over time. Now there could be very good reasons why you might want to, you know, access your your stocks and shares. ISA and the fact that they are flexible and accessible is one of the the key advantages of them.
Craig Rickman:But obviously to be aware that any money you take out is gonna sort of extend the the time period that it would take for you to become an ISO millionaire.
Kyle Caldwell:In terms of the number of ISO millionaires we have as customers, our Interactive Investor, we've seen a 79% increase over the past year. So we have 2,869 AISA millionaires, and that's up from 1,607 a year ago. And those figures are based from the February to the February this year. Craig, what are your thoughts on I mean, there's not just one reason. What what what what do you pick out as the main reason for you why we've seen this big increase over the past year?
Craig Rickman:Yeah. I mean, I guess the first thing to say there, that's a that's a huge increase over a over a twelve month period. But as you say, yeah, a few reasons could be driving that. I guess that the one of the the key ones is has been portfolio performance. Most people would have been enjoying some would have enjoyed some some some big gains over that period due to due to increases in in stock markets.
Craig Rickman:That would be one. Another factor is that people have had more time to to pay into an ISIS, sort of had an extra year's allowance. So over time, because, you know, ISIS launched in 1999, with every passing year, you know, people could have paid more money into the tax wrapper, that gives them a better chance of of, you know, reaching that sort of holy grail of ISO millionaire status. And I guess another factor could be the interactive investor because we charge a flat fee, they tend to be more beneficial for bigger portfolios because it doesn't really matter how much you have in your ISA, you'll still pay the same account fee. So that could have prompted people to to shift their ISAs to Interactive Investor from elsewhere.
Kyle Caldwell:Yeah. I completely agree. And I think in particular, the strong performance of The UK stock market last year, I think, has tipped people into the millionaire status for ISAs. You know, if you're if you're around £900,000 a year ago, the footsie, you delivered over 20% last year. So I mean, that was if if you just had a footsie tracker funds, that would that would, you know, obviously, not gonna have a footy tracker funds to hold your portfolio.
Kyle Caldwell:But if, you know, if that's contributors and your overall portfolio has had a really strong year and it's done more than 10%, then you'd either be very close or you would get over if you add, you know, 900,000. I mean, know, you need about 13% return would tip you over.
Craig Rickman:Yeah. I think that's a really good point, isn't it? It's not been as a result of people taking sort of particularly aggressive risks over the past year. It's just that they've they've been invested in in the markets and particularly, as you say, had exposure to The UK.
Kyle Caldwell:So we're gonna move on in a moment to look at what have been the best performing funds since ICEs were launched. And then we're also gonna take a look at what are the top holdings among our cohort of ICE millionaires. But before we move on to both of those, I just want to quickly cover off what are the key differences between an ISA and a self investor personal pension, a SIP. Of course, you can have both, but they can depends on where you are on your on your investment journey. So, you know, you could favor one over the other at certain points of your journey.
Craig Rickman:Yeah. I think that's this is a really interesting topic to to to briefly delve into because you know, while becoming an ISA millionaire is an incredible achievement, perhaps something that would be a bit more palatable for people as a as a a kind of first milestone would be to come become a portfolio millionaire. So include pensions and ISAs. Include both of them into the mix because in some cases, might be better for your money if you've got any spare cash left over to put that into a pension, such as a self invested personal pension or a SIP in instead of an ISA. So some of the key differences, there there are sort of two ways that that they differ really.
Craig Rickman:So they're both tax wrappers, both really good ways to save for your long term future. The two differences center around how the tax advantages work and and sort of access and flexibility. So with a pension, you get upfront tax relief, which is at your marginal rate of tax, so the rate of tax you pay on the next pound you earn. So that you get that money on the way in. When you take money out, when that time comes, you can take up to 25% of the fund tax free or most pensions allow you to, and the rest is taxable.
Craig Rickman:So pensions benefit those where the the the sort of the tax relief that you get on the way in is higher than the tax you pay on the way out. So if you're a 40% taxpayer and when you're paying money into a pension and you pay 20% on the way out, that's where they work really, really well from a tax perspective. With ISAs, you don't get any tax on the way in but withdrawals are tax free. So it so it reverses. The other the other the sort of the the big difference is around access.
Craig Rickman:So with a with an with an ISA, you can access the money whenever you like. With a pension, under current rules, you're restricted to age 55, but that's rising to 57 in 2028. So I think that's the understanding how the two work is really important because, you know, depending on what your goal is, one will be more suitable than the other. But I think for most people, if you've got, you know, a really well rounded portfolio, then you'll have some money in a pension such as a SIP and some money in an ISA as well.
Kyle Caldwell:I think, you know, if you became an ISA or a SIP millionaire, both are remarkable fees. But I'd argue that becoming an ISA millionaire is a greater achievement because you're not getting the tax relief on the investment return. You know, your money's not getting the tax relief boost. And also, with
Craig Rickman:an ISA, there's more opportunities to dip into it and potentially pull money out. Whereas obviously with a self investor personal pension, you can't dip into it until you reach a certain age. Absolutely. Yeah. And the annual allowances, the the limits that you can pay into each tax are different.
Craig Rickman:So they're more generous for pension. So you can pay up to a 100% of what you earn, capped at £60,000. You might be able pay more using something called carry forward relief. But with an ISA, it's it's £20,000. So whichever way you look at it, the the the sort of options to pump money into pensions every year or the scope is a lot higher than ISAs as well.
Craig Rickman:So, yeah, hence why, you know, like you say, becoming an ISA millionaire is probably a harder thing to do.
Kyle Caldwell:So let's now move on to what have been the best performing investments since ISAs were launched on the 04/06/1999. So we recently wrote an article on this on the Interactive Investor website, ii.co.uk. And what we found was the more adventurous types of funds and investment trusts did perform best over that long time period. And we looked at the best performing best overall sectors. So firstly, covering off sectors.
Kyle Caldwell:So of the top 10 sectors, nine of the 10 are investment trusts. And for me, the key reason why that's been the case is because investment trusts have the ability to gear. They have the ability to borrow to invest. And over a very long time period, this should work in their favor over an open end of funds. Because over a very long time period, you'd expect the market to go up, and gearing will magnify those gains.
Kyle Caldwell:And very briefly, in terms of the individual winners, since Isis were launched on the 04/06/1999, the top five were Aberdeen, Asia Focus, Scottish Oriental, smaller companies, Pacific Horizon, BlackRock World Mining Trust, and HG Capital Trust. Yeah. Interesting, isn't it? It really does sort of illustrate the importance of building an ISO portfolio that's that's diversified. Completely agree.
Kyle Caldwell:And, you know, we we speak about diversification a lot on this podcast. And we do because we think it is very important and it's worth repeating numerous times. I mean, at the end of the day, if you have a portfolio that's heavily exposed to one area or one particular share or fund or investment trust, then you're exposing yourself to pretty high levels of risk over time. And, you know, it might go well for the periods, but it, you know, things can also turn badly as well.
Craig Rickman:They can. Yeah. It was like the there's an article recently that showed those some people with with 8 figure ISA millionaires. They're like the super ISA millionaires. Some with think an average of 11,000,000 in ISAs.
Craig Rickman:And needless to say, to have accrued that, you know, those kind of size pots would have required some some pretty aggressive investing or pretty aggressive investing strategy that you wouldn't have been able to get there purely by sort of investing in the stock market. What may be sort of overlooked in that in that respect are the risks that you have to take on to do that, and it could it could have gone the other way for those people. I mean, ultimately, the the the investments that they backed, the shares that they backed, you know, were successful, wildly successful. But, yeah, there was there was no guarantee that that was gonna happen.
Kyle Caldwell:I mean, while that's worked out for, you know, those sort of super ISO millionaires, I do think, you know, I've been a lot more comfortable sort of spreading risk a lot further and wider than that. I mean, one trend that we see amongst our ISO millionaires, an Interact Investor is that they are very active. They do trades quite frequently. So on average, they make 30 active trades in a given year. So I think, you know, you know, it's hard.
Kyle Caldwell:You know, I wouldn't wanna, you know, completely generalize, but for me, you know, they're they're not just buying and holding and, you know, coming back to the portfolio in a year's time. I think they're they're reviewing the portfolio a lot and making changes accordingly and potentially, you know, cutting losers, taking profits, and then reinvesting into, you know, undervalued areas that they're hoping that over time will recover their poise. When looking at the top 10 holdings for the cohort of icy millionaires, We don't see any sort of, like, racy stocks in the top 10 or smaller companies. We see UK large blue chip companies. So seven of the top 10 are FTSE 100 stocks, and they are Rolls Royce, Shell, AstraZeneca, National Grid, GSK, Rio Tinto, and Lloyds Bank and Group.
Kyle Caldwell:And then the other three in the top 10 are Alliance Witten, Scottish Mortgage, and City of London, which are all investment trusts. And compared to our non ISA millionaires, one of the key differences between the top tens is that there is a greater preference to own individual stocks. I think that might be down to greater levels of experience, and therefore, in some instances, greater confidence to own individual stocks. And also, you know, many of these UK the blue chips are dividend paying companies. So, you know, the average age of our ISA millionaire, I think it's 72.
Craig Rickman:72.
Kyle Caldwell:Yeah. So I think, you know, at at that stage, you're looking to, you know, you're looking for your investments to throw off a decent level of income. Well, some some people are. That's a strategy that a lot of people do adopt because it can help fund your lifestyle in retirement.
Craig Rickman:Yeah. I think that's the sort of two elements. They've they've got more skin in the investing games. They've got more experience. They feel more comfortable taking on or investing in in single company stocks.
Craig Rickman:But also, yeah, they they're at a point in life where they want to enjoy the income from their ISOs and the the the tax free income. I guess that's that's one of the really key aspects that they've that they've built these, you know, really impressive 7 figure portfolios, and now they wanna, you know, enjoy the the fruits of their labor.
Kyle Caldwell:And to me, it's also interesting that there's no global tracker funds, no global index funds or ETFs in the top 10. Again, I think that might be down to the average age of the isomillionaire and where they are on their investment journey, and they're looking more for sort of income producing investments over growth investments. And, you know, I I think, you know, index funds and ETFs. I think in the accumulation stage, when you build and up your pension pot, they're they're great options to have as a potential core holding. But when you come to retirement, you might be a bit concerned about the potential volatility of, you know, owning the whole market at that point.
Craig Rickman:Yeah. Absolutely. I I think it's worth remembering that these lists are you know, they reflect what people are owning today, not necessarily the the stocks and the investments that they've chosen on the route to becoming an isomillionaire. So, you know, once they've, yeah, once they've got there, it's it's highly possible that they might have they might have changed strategies.
Kyle Caldwell:Yeah. I completely agree. I think that's very important to bear in mind that that that top 10 holdings for ISO millionaires, that is what they own today rather than what they owned in the past. In terms of investment types, an interesting trend is that we see AISA millionaires having a greater preference for investment trusts. So the average AISA millionaire holds just under a third in investment trusts.
Kyle Caldwell:And for non AISA millionaires, the figure is act is just below 15%. That's quite a big difference. And I think that reflects the, you know, a number of investors are very savvy and very aware of the structural advantages that investment trusts have over funds. And over the over the long term, gating can magnify returns. And those statistics I ran through earlier about the long term returns for various sectors and funds investment trusts really do show that.
Kyle Caldwell:Of course, it can go the other way in a fallen market. Gearing can magnify losses, but I do think if you're holding for a very long time period of ten, twenty, twenty five years, over time, the ability to gear if the investment trust does choose to do so, I think it can really work in the favor of private investors. In terms of other trends, we see the the typical isomillionaire, they're more likely to get their sort of business done early at the start of the new tax year. For me, one of the main benefits of doing that is be is that you you got an extra year in the market. And another potential benefit is that if you leave it a bit too late and you're investing towards the end of the tax year, you might be a bit too hasty and you might buy something that you then end up regretting.
Craig Rickman:Yeah. Yeah. I think one one thing we should also acknowledge around that is that is contingent on having sufficient capital at the at the start of the tax year. So some people have sort of deployed any spare cash in the previous tax year to top up their ISAs or potentially their their pensions as well. But if you do have spare cash to to sort of get it in early, enjoy an extra year in the market, potentially an extra year of dividends.
Craig Rickman:That's something that isomillionaires do. And, yeah, that means, yeah, there's there are some clearly some benefits for doing that.
Kyle Caldwell:And the final point is inflation, which I should have mentioned earlier. So when I ran through those calculations regarding how long it will potentially take to become an IC millionaire, they, of course, didn't factor in inflation. And the reality is, you know, if you're starting today and you wanna try and become an IC millionaire, £1,000,000 in today's money will not be the same as it is in the future due to the effect of inflation.
Craig Rickman:Yeah. It's really important to to factor inflation in to your future financial goals, whether it is I mean, for most people, the goal isn't necessary to become an IC millionaire. It's to accrue enough money that you can have financial security and financial freedom down the line. But, you know, as you say, inflation over time can chip into the buying power of your money. So it's, yeah, really important to factor that in when setting yourself, you know, future financial goals.
Kyle Caldwell:And finally, in terms of a few quick pointers, many of which you've already ran through on the podcast in terms of the sort of ingredients you need to be try and become an isomillionaire or to build a significant pot to give yourself financial freedom later in life. For me, it's, you know, invest what you can afford to invest. Be mindful of having a diversified portfolio. You know, don't put all your eggs in one basket. Be patient and think long term.
Kyle Caldwell:Any others to add to that list,
Craig Rickman:Craig? Absolutely. Agree to you know, agree with all of those. A couple of final points is, yeah, don't don't overlook pensions when you're looking to accrue wealth for the future. You get the the upfront tax relief, like we've mentioned, can give your money an immediate boost.
Craig Rickman:And if you pay higher rates of tax, can you can claim some extra back. But also if you are employed and then you'll be part of a workplace pension as well where your employer has to has to contribute into a pension but sort of up to certain levels provided you do. So, you know, making the most of those, you know, the facilities of pensions, upfront tax relief and employee contributions can give your wealth a boost for the future.
Kyle Caldwell:Craig, thanks for your time today.
Craig Rickman:Thanks for having me.
Kyle Caldwell:And thank you for listening to this episode of On The Money. Hope you've enjoyed it. We love to hear from listeners, and you can get in touch by emailing us on otm@ii.co.uk. In the meantime, you can find plenty of practical pointers and analysis related to funds, investment trusts, ETFs, and personal finance on the Interactive Investor website, and I'll hopefully see you again next week.