ISA season might have so far disappointed, but that doesn't mean you need to turn your back on these accounts. They're the darling of the savings world for a reason – they offer the chance to generate returns that are entirely tax-free, and even though those returns might be negligible at the moment they could easily build up over the long-term.
There's one section of the ISA market that could prove even more fruitful. There are growing reports that becoming an ISA millionaire is an increasingly achievable goal, with rising personal allowances meaning anyone, with a long-term view, could become an ISA millionaire in 30 years – as long as the focus is on stocks and shares ISAs, rather than their cash-based alternatives.
Investing your full ISA allowance (currently £11,520, but it's set to rise each year with inflation) each year in stocks and shares ISAs means someone who opens an account today could potentially reach the £1 million mark in 29 years, according to calculations from wealth management firm Brewin Dolphin. This is assuming average returns of 5% per year after fees, something which is regarded as being highly achievable and even conservative based on current fund performance.
However, the effect of compound interest is key. It's imperative to invest the full ISA amount each year, without removing any funds or creaming off some of the interest, with a long-term investment view being crucial. It's also important to remember that stocks and shares ISAs are a lot riskier than their cash-based counterparts, with there being no guarantee of returns – which is why taking a more conservative approach, rather than going after higher-risk funds, is the answer.
Slow and steady wins the race, and with religious re-investment each year (and careful selection of ISA funds) anyone under the age of 40 could have the potential to become a millionaire by the tine they retire. Brewin Dolphin's calculations estimate that, if you start now and invest your full ISA allowance each year, by 2042 you could have a pot worth £1,030,953 based on 5% growth – all from an investment of £508,773.
There are signs that the younger generation is keen to get in on the action too. Research from The Share Centre has found that, although the average stocks and shares ISA investor will be in their 50s (55% of those surveyed were over the age of 50 when they first subscribed), 42% of ISA investors under the age of 35 began investing in the last three years. Low interest rates on cash-based accounts are the primary reason for two-thirds of that age group investing in such ISAs, with this surge in activity showing many are looking to reap the benefits of stocks and shares to help grow their nest egg.
"Consumers are desperately trying to make their savings pots work as hard for them as possible, so ensuring they maximise their tax-free cash ISA allowance is vital," said Richard Eagling, head of investments at Moneyfacts. "With the average interest rate on a cash ISA currently just 1.64%, a stocks and shares ISA can offer an attractive alternative for those looking for higher returns and who are comfortable with the extra risk."
It's important to remember that choosing the right ISA funds is key to achieving measurable growth, and of course, as it's the stock market, there's always an element of risk. There's no guarantee of returns and you may get back less than you put in, which is why those who don't have the appetite for that might want to stick to the less risky alternative of cash ISAs.
Based on current interest rates and the lower cash ISA limit (currently £5,760) there's little chance of achieving the 5% growth needed to become a millionaire in 30 years, but that shouldn't put you off. It could still add up to a princely sum after a decade or two, particularly if interest rates start to rise, and if you're willing to lock your money away (which is the only way to achieve real growth) you could still generate a decent return. So, make sure to compare the cash ISAs currently available to help build your wealth for the future.
For a more in depth look at Investment funds - check out our top 5 most traded funds for January
Compare the best available stocks and shares ISAs
Looking to selct the ISA fund yourself? - use our new self select ISA service
Make sure you use your 2013/14 ISA allowance - Find the right Cash ISA to apply for today
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