In 2003, John Lee, Baron Lee of Trafford, became the UK's first Individual savings account (Isa) millionaire. Below, he describes his experiences and gives five key rules for investors starting Isas today.
When personal equity plans (Peps), the precursors of individual savings plans (Isas), were first introduced in 1978 I immediately recognised them as a very attractive investment opportunity – free of both income tax and capital gains tax. However having always taken my own investment decisions there was no way I was going to pass this over to a Pep manager, and in 1987 with Peps in their infancy it was very difficult to find a manager/broker/banker who would allow me the discretion which I sought – most seemed to have a very restricted list of holdings to choose from. Finally I 'discovered' Midland Bank Executor and Trustee and off I went; my first purchase was of Manchester based cash rich small electrical appliances manufacturer PIFCO – subsequently taken over by Salton of the US. For the next 16 years I managed to find the maximum allowance and thus by December 2003 had invested a total of £126,200, plus of course reinvesting all dividends. At that date my Peps/Isa portfolio had reached £1m in value. Over the next 10 years I invested a little more money but this became increasingly less important as my overall value pushed steadily and significantly ahead.
Anyone starting their own Isa today has one new additional advantage – Aim shares are now eligible for Isas following a long campaign to obtain this in which I was very active, with others, at Westminster. Thus a current Isa represents an outstanding investment/savings opportunity – to invest up £11,520 this year – free of income tax, capital; gains tax (CGT) and, on current expectation for eligible Aim shares, free of inheritance tax if held for two years. This makes investing through an Isa immensely more attractive than building a normal non-Isa portfolio, subject to all the usual taxations. I wish I had more of my Aim holdings in my Isa, but to put them in I would effectively have to “sell” them thus in many cases triggering a hefty CGT bill and also, of course would have to create the liquidity/funds to “buy” within my Isa.
I would suggest a number of key rules for an investor starting an Isa today:
1. Buy into 'proper' businesses which you are prepared to hold for many years – established companies trading profitably, paying dividends, and cash positive or with a very low level of debt.
2. Adopt a conservative approach – no speculative exploration or biotech investments – an Isa is not your own mini casino – focus on avoiding losses.
3. Try to invest a certain amount each year – even if you haven’t the funds available to achieve the maximum allowance.
4. Re-invest all dividends – try to avoid withdrawals from your Isa – once done you can’t put the monies back!
5. The funds you build up in your Isa represent a very valuable 'tax-free' pot – thus try to avoid Isa plan managers debiting their annual charges etc to your Isa – try to get them to invoice you separately, outside your Isa.
Currently I have 16 holdings in my Isa: Air Partner, BBA Aviation, Charles Taylor, Christie Group, Concurrent Technologies, Dairy Crest, Fenner, Grafton, MS International, PZ Cussons, Quarto, Smiths News, Town Centre, Treatt, VP, and Wellington Markets.
How to Make a Million - Slowly: My Guiding Principles From a Lifetime of Successful Investing by John Lee (FT Publishing) is available from Amazon priced £16.19.
