How to become an Isa millionaire

However, a handful of dedicated investors have managed to achieve the elusive £1m Isa. And if a 38-year old started contributing to an Isa today, he or she could reach this goal by age 65.

The Isa millionaires that have been created to date, will not have had an easy ride. The Pep (personal equity plan), the predecessor to an Isa was only introduced in 1987 and strict annual limits have restricted total investments in Isas since then to £212,080 overall.

Julie Lord, a chartered and certified financial planner at Bluefin, says: "Even with maximum contributions throughout the past 25 years, it would only be possible for an individual to have made it to £1m in an Isa with an 11 per cent annualised return. That's some ask, especially given the 2008 global financial crisis, and it would have taken excessive investment risk with exceptional performance from some single stocks to achieve."

Ms Lord says: "There are only a handful of investors who have thus far become Pep/Isa millionaires, and none as yet through investing into risk-controlled, diversified multi-asset portfolios, unless they managed to completely sidestep the market downturns.

"Unless the Government carries out its threat to cap Isa limits, however, there will be some true Isa millionaires created in the future.

"If the annual Isa allowance stays at £11,520 and growth is 7.5 per cent on average a year, someone starting to invest today and using his or her allowance every year, would be an Isa millionaire by 2040. A couple would make it by 2032."

The most famous Isa millionaire is John Lee, who passed the £1m watershed in 2003, by investing directly into small UK companies, and has written a book about how he achieved this. In 2006, he was made a life peer in the House of Lords.

How to Make a Million - Slowly: My Guiding Principles From a Lifetime of Successful Investing by John Lee is set for general release on December 13, 2013 (FT Publishing) priced £17.99.

Lord Lee says: "There are two things you need for successful investing. The first is common sense and the second, and perhaps most important, is patience."

In the book he dedicates a whole chapter to investment mistakes. "My biggest mistake was in selling good stock too soon. Most private investors chop and change, incur costs and don't run winners. Modern technology encourages short-termism in investing. Investors can see the short term movements, which introduces the temptation to trade a bit more."

"If you want success in direct stocks, you've got to find it interesting and enjoyable and fall in love with the stock market. It has been a marvellously enjoyable interest for me over the years. My friends and colleagues have gossiped with me about investments and in the tributes I've thanked all those who have exchanged ideas with me."

"My normal approach would be to spot a company through the Investors Chronicle and buy a small shareholding. I then pick up the telephone to the chief executive officer and say. 'I've just become a shareholder, can I come to see you?'"

He admits that his being a freelance writer for the Financial Times has helped him get in to see companies. However, he says: "If individual private investors made contact they might be more favourably received than they imagine."

He also finds it useful to attend company AGMs. "On the margins of a meeting, I make a point of having a chat to other board members, who have been told to chat to shareholders.

"If more private shareholders did try to meet the companies and tour the factories, then companies would be more inclined to organise shareholder open days."

"There could be lots more bridge building between small companies and private investors. The companies could do more and the private investor could do more. The fault is on both sides."

So what does Lord Lee get out of company meetings?

"I'm trying to build up a jigsaw on a company. This is made up of the IC tip or report, directors' shareholdings, profits records, borrowings, institutional share holders, and finally a visit to the company to get a feel of the overall operation.

"You see how the chief executive or finance director is received by employees - whether employees turn their back or turn away. You also might see the car that the chief executive drives - the latest red sports car is bad news. Or you might find out that the major ambition of the chief executive is to take over the local football club - also bad news.

"The question I like to ask is: 'Taking almost everything you can tell me and the things that you can't tell me, on an overall optimism scale of 1-10 where are you? Most answers are fairly realistic."

"I'm not looking for inside information. I'm trying to form an impression of the long term strategy of the company and the ambitions of the people running the business. If something sends warning signals then steer away from it."

Many companies are using video to communicate with shareholders. "One would rather have it than not," says Lord Lee. "Obviously a video is staged and the chief executive is putting the best interpretations on it. However, unless the person is a knave or a fool then usually they are telling the truth."

Lord Lee also has a tip for anyone holding Isas. He says: "People should get their Isa manager to invoice them outside the Isa for their annual charge - not to debit it to the Isa, because the tax free pot is then denuded of those costs. If you can do it from outside you are preserving the large pot."

Attack on Isas

Some investors are worried by rumours that the government might launch a tax raid on Isas.

However, Lord Lee says: "There are 14 million Isa savers. Of these the majority are in cash but there are still lots of equity Isa holders.

"HMRC don't have any records of people's Isas because you don't have then on tax returns. Therefore it would be a huge administration job to get hold of the information via asset managers. HMRC could ask or compel plan managers to pass on information but it would be a huge administration job and it is unlikely the government would want to go down that road.

"The government of the day would be afraid to raid existing portfolios. I don't think they could tax the capital value. I think it would be illegal to try to tax the income and capital. If you put money into an Isa on the basis of capital gains tax and income tax relief, then I can’t see how they could change the rules. Yes, they could change them for future Isas - or they could stop people like me putting money in - but I don't believe legally you can attack what is already there."

Lord Lee's Isa portfolio

Lord Lee holds 40 stocks because it "makes sense and is manageable". His current holdings include the following six stocks - all of which he has held for many years:

■ Treatt (TET)

■ Air Partner (AIP)

■ Dairy Crest Group (DCG)

■ BBA Aviation (BBA)

■ Fenner (FENR)

■ Smiths News (NWS)

However, Lord Lee's is a high risk approach to investing, that won't be suitable for everyone. Here are two case studies that highlight how other investors have reached major milestones with their Isa portfolios by taking less risk and investing via managed funds.

Case study: High-risk diversified Isa portfolio

Sam and Molly had maximised their Pep and Isa stocks and shares allowance every year since 1987 and came to Bluefin in 2000 for help with their overall financial planning. They confessed to a very haphazard approach to investment and had been lucky with some single shares in Microsoft and Walmart which had significantly increased their portfolio value. However, their portfolios had been heavily hit by the stock market down turns of 1990, 1994 and 2000.

At the start of 2000, each of their Isas was worth £227,000. Bluefin has since managed Sam and Molly’s investments through strong portfolio diversification, managing risk as well as seeking strong returns. As Sam and Molly has significant other assets they invested in a high risk portfolio which targets 7.5 per cent growth a year. They have continued to maximise their Isa allowances and each Isa portfolio is now worth £590,000.

How Sam and Molly are invested:

Case study: Core and satellite Isa portfolio

In 2008, Paul Gibson, a chartered financial planner with Carbon Financial Partners took on as clients a couple who has a combined Isa portfolio of £695,000. Their portfolio has subsequently grown to £1,033,007 but has also been substantially de-risked.

He says: "They had been investing in Peps and subsequently Isas since their introduction and had a disparate collection of investments including self-selected individual shares and various actively managed mutual funds.

They had contributed around £190,000 each over the years and had reached their planned retirement date but were concerned whether they actually had enough money and whether they were taking too much risk with their portfolio. They described their investment strategy as ‘haphazard and probably too risky’ and whilst they had enjoyed notable successes with companies such as Wood Group and Exxon Mobil, they had experienced losses with the Aberdeen Technology Fund and some Zero Dividend Preference Share holdings.

Mr Gibson calculates that they needed a 6.9 per cent annual rate of return on their portfolio to ensure that they had enough money to do the things they wanted without fear of running out of money.

However, he found they were taking a much higher level of risk than they needed t0, and that they were not being sufficiently rewarded for these risks, primarily due to excessive ongoing fees in their funds.

He consolidated their portfolio from three separate platforms onto one and adopted an asset class portfolio based upon low cost passive funds with additional tilts in favour of smaller and value companies.

The cost reduction in ongoing fees was around 40 per cent and the portfolio was implemented in July 2008 with an initial 60 per cent in equities and 40 per cent in fixed interest investments.

It experienced almost immediate losses which was consistent with global markets at that time. Since then, however, the portfolio has fully recovered and with regular rebalancing, a discipline that was completely new to the clients, their portfolio has now exceeded £1 million.

Mr Gibson says that the annual return on the portfolio net of fund, custodian and financial planning fees has been 7.71 per cent.

How Paul Gibson's clients are invested: