Start saving to make a million

David Prosser explains how filling your ISA allowance each year could pay dividends.

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Who wants to be a millionaire? Some 1,322 savers at Hargreaves Lansdown now hold more than £1m worth of investments in their tax-free individual savings accounts (ISAs), the investment platform has just revealed. That’s a 14% increase on the number of ISA millionaires on Hargreaves Lansdown’s books compared to just six months ago.

Now is a good moment to be thinking about your next ISA investment. With the 31 January deadline for self-assessment tax returns out of the way, the next significant date in the tax year, 5 April, is coming up fast. That’s the final day on which you can still make use of this year’s ISA allowance – any of the £20,000 allowance for 2024-25 that you don’t use by then is gone for good.

Remember, all investments held inside an ISA are tax-free, however much income and profits they generate. That gives you a head start in the race for millionaire status – there’s no need to give up any of your returns to the taxman.

What, then, is the secret to winning that race? Well, the first point to make is that investment is a long-term pursuit – ISAs are almost the opposite of a get-rich-quick scheme. The average ISA millionaire at Hargreaves Lansdown is in their early seventies. But irrespective of their age, almost all these investors have been making consistent contributions over an extended period, investing as much of their annual allowance each year as they possibly can.

For investors now focusing on this year’s ISA selections, investment trusts could be a good place to start.

David Prosser

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Invest in that way and there’s no need to take outlandish risks with your money – most of the shares and funds in the ISA millionaires’ portfolios are relatively plain vanilla holdings. They include a number of FTSE 100 stocks, as well as quite a few funds that do little more than track a market index.

Still, choosing your investments wisely is important. And investment trusts could be a good option for your portfolio. Last year, the AIC published a list of no fewer than 30 investment trusts where investors could have become millionaires by investing in the funds each year since 1999 when ISAs were introduced. Indeed, at the top of that list, the leading investment trusts would have turned your ISA contributions into investments worth more than £2m.

That’s not to suggest investment trusts are the only option for superior long-term performance. But countless studies have found that over longer-term periods – 10 years or more, say – investment trusts have tended to outperform equivalent funds that use other structures.

There are some good reasons for this. Investment trusts are uniquely allowed to take on leverage – to borrow cash to top up investors’ money – which boosts returns when asset prices are rising. They also have a strong track record on charges – and many have responded to competition by cutting fees in recent years. In addition, many investment trusts have longstanding managers with experience of running the fund over different parts of the economic cycle. The structure of an investment trust, with a fixed pool of money to manage, has advantages too; managers don’t have to worry about inflows and outflows of investors’ cash.

There are no guarantees. Like any fund investing in assets that can fall in value as well as rise, investment trusts go through stronger periods of performance and less successful times. There can be no certainty they will outperform other types of funds investing in similar assets.

Still, for investors now focusing on this year’s ISA selections, investment trusts could be a good place to start. Their long-term attractions are potentially enhanced this year by the fact that shares in many popular funds are currently trading on unusually wide discounts to the value of their underlying assets.

Not everyone will make it to millionaire status – not least because many people don’t have the disposable income available to max out their ISA contributions. Still, it’s important to give yourself the best possible chance of growing your investment portfolio to the maximum extent.