60 fresh Isa ideas

The earlier in life you start investing, the better your chances. However, if you can invest the maximum allowance each year and benefit from above average investment growth you might be able to achieve this in 20 years.

So no surprise that the band of happy investors who have achieved the million pound Isa goal is growing in number. The first person to achieve this goal was Lord Lee, in 2003, who gives his tips for Isa investing here.

Wealth manager Brewin Dolphin has revealed that it already has 15 ‘Isa millionaire’ clients, whose Isa pots have broken the magic million pound barrier. A further 40 have assets in Isas of well over £750,000.

These investors have two things in common – they invested directly in equities and took some risks, but Brewin has calculated that even Isa savers who invest the full Isa allowance conservatively every year, could reach the million pound mark in less than 30 years.

With conservative assumptions on growth and income (5 per cent combined) and inflation (2.5 per cent), 2042 would see a total fund of £1,030,953 representing a gain of £522,180 on a total investment of £508,773. The total tax saving over this period would be an impressive £292,215 and a £1 million tax-free fund for life.

Isa millionaire chart

Source: Brewin Dolphin

Investing the full annual Isa allowance of £11,520 is not possible for everyone. But even if you can squirrel away a couple of hundred pounds a month over a period of 20 years, and achieve 7 per cent annual investment growth you could achieve a more realistic goal of £100,000. You can then use the income from this to help you on the way to financial freedom, whether in reducing your working hours to spend more time on a pet project, or supplementing a private or state pension.

In fact, if a couple could between them find £500 a month to put away in Isas over 25 years, they could have just shy of £400,000 (based on a 7 per cent annual investment return). If they then took 3 per cent income from that Isa, it would give them £12,000 a year, described by the Joseph Rowntree Foundation as the minimum retirement income standard that allows a couple to participate fully in society.

Stocks and shares Isas are also suitable vehicles for investing for lump sums over shorter periods of say five to 10 years, for example to pay for a child’s university education, a deposit on a first home or a wedding, or to pay for long term care at the end of life. Any growth on the investment inside the Isa is free of capital gains tax (CGT).

No wonder almost around 14.6m adult Isa accounts were subscribed to in 2012-13, up from 14.0 million in 2011-12, according to HMRC. However, around 80 per cent of these accounts were Cash Isas, where the hopes of building substantial sums for the future are slim. Cash Isas can be used to build sums for short term goals, such as an emergency fund or saving for a deposit for a house purchase. But they’re not going to help you build substantial sums for the future.

Cash vs equities: Fidelity calculates what savers would have accumulated in the last 10 years (from 27 February 2004 to 31 January 2014)

• If a saver had invested £1,000 in the average high-street cash savings account 10 years ago, they’d now be left with £1,106.71.

• If a saver had invested £1,000 in the FTSE All-Share 10 years ago, they’d now be left with £2,201.41.

That’s a difference of £1,094.70, despite investing the same amount to begin with.

Nevertheless, a typical route is to first build up six months’ salary in cash Isas. Here you will have to monitor the rates on Isas each year to make sure that your money is keeping pace with inflation (or in current economic circumstances, losing as little in value as possible).

We recently reviewed the Isa portfolio of a 35 year old who had already stashed away £50,000 in cash Isas and was busy building on his £25,000 in stocks and shares Isas. But our expert advised that if he was investing over a 25 year period, he should use pensions alongside Isas.

Most investors tend to combine the two tax wrappers. The important benefit of a pension is the up front tax relief at your marginal rate of tax. So a higher rate taxpayer at 40 per cent would only have to contribute £600 to a pension to get a £1,000 contribution (£200 of this would have to be claimed via your tax return). This tax relief compounds over the years. You are then taxed on the income that you take from the pension at retirement. So if you are a higher-rate taxpayer when contributing and a basic rate taxpayer in retirement, this works well.

With Isas on the other hand, you don’t have any upfront tax relief but can withdraw a tax free income. So the tax wrappers are complementary.

But everyone has a personal tax-free allowance (£9,440 for under 65s, £10,500 for over 65s and £10,660 for over 75s in 2013/14) which means a small tax free income from Isas is not a huge advantage. Where they come into their own is when they are combined with pensions income, to keep your total income within the 20 per cent income tax bracket.

A downside of pensions is the constant government tinkering with the pension rules.The latest move is a reduction in the lifetime limit for pensions saving from £1.5m to £1.25m in April 2014.

Isas have been so far immune to government tinkering. The Liberal Democrats are in favour of a £15,000 cap on Isa saving and in October 2013 the Telegraph reported that Treasury officials are exploring the impact of a £100,000 Isa cap.

However, just 2 per cent of the population have more than £100,000 in stocks and shares Isas. Also, any retrospective meddling on funds already built up in Isas would be a huge administrative headache for HMRC, in identifying Isa policies via the providers (they don't appear on your tax return).

All the same it is good to use allowances where you can as if you don’t use the annual Isa allowance you lose it forever.

The end of the tax year is when most people are thinking about their Isa allocation and where to invest it. But if you’re worried that stock markets are at high levels and could fall from here, you don’t actually need to invest it all in one go. Many stockbrokers will allow you to drip feed it into the stock market over a period of several months.

You also need to look at your existing Isa holdings to make a good selection. There are a few ways to improve your portfolio.

Rebalance

When you start investing you should set out with an ideal asset allocation in mind for your portfolio. Simple versions of this for a stocks and shares Isa would be a split between equities and bonds, for example 60 per cent in equities and 40 per cent in bonds for a medium risk investor and 80 per cent in equities with 20 per cent in bonds for a high-risk investor.

There are lots of other asset types that you could add to the mix, for example, commercial property, gold and commodities.

In last week’s reader portfolio review, the 35-year old Isa investor summed up his thinking nicely: “I aim for an overall 60 per cent to 40 per cent equity to non-equity split, with the non-equity sections provided by 20 per cent bonds, 10 per cent property and 8 per cent commodities.” This asset split enables him to keep tabs on his portfolio.

Once a year, you should check that your chosen asset allocation is still right for your needs and make sure that your portfolio is still allocated in the right proportions. 2013 was a good year for equities, so you might find that equities now account for a larger portion of your portfolio than this time last year. You may need to sell or add to holdings to rebalance in line with your desired asset allocation.

Lower costs

Costs are the one thing that you can control when you are investing and at Investors Chronicle we see plenty of reader portfolios that aren’t working hard enough to bring costs down. You can do this by making sure that you are on a low cost platform, or by limiting your trading costs, or by using low cost tracker funds for the core of your portfolio.

Don’t over diversify

We see many instances of readers buying investments every year over a 30-year period, ending up with 50 or more holdings. Not only is this difficult to monitor and keep track of, it can also have a negative effect on performance. The more investments, and particularly actively managed funds, that you hold, the greater your chances of turning your portfolio into an expensive tracker fund.

It is better to focus the mind by calculating the percentage that an investment represents within your portfolio. Anything under 1 per cent is a distraction and can be got rid of all together. Anything under 2 per cent can be combined with other holdings. You’re not a fund manager with a team of analysts under you following the move of every small holding. You probably have other things you do with your day so try to make investing easier.

Fifteen to 20 holdings is more than enough to give you a diversified portfolio. You could establish a core of say five exchange traded funds or tracker funds that are low cost and will give you market returns. Then add a few direct stocks or actively managed funds that you think will grow faster than the market.

Look at your Isa in the context of all your investments

The readers who have the best investment strategy think of their portfolio as all their assets, including workplace pensions and the equity in their home. Choose your Isa investments to fill gaps among your other investments. For example, if your workplace pensions options do not include commercial property, commodities or emerging markets, then these might be options for your Isa. If your workplace pensions are invested in passive investments, then you might like to try actively managed investments in your Isa.