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Drawing money into an ISA over time can be an easy way to try to build a tax-free long-term nest egg. But how big could such a nest egg be?
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
The answer depends on several factors: how much you put in, for how long and how much it grows (or not).
Doing math
For example, imagine someone puts £150 a week into their ISA for 35 years.
How big that growth is will depend on their compound annual growth rate, or CAGR. At a CAGR of 5%, it will reach over £720k.
At 10%, that number would be £2.2m. At a CAGR of 15%, after 35 years the ISA should be worth £7.3m. Yes, £7.3 m!
It’s hard, but it’s possible
CAGR includes capital gains but also dividends. However, capital losses (from selling shares for less than what you bought them for) can eat into it. And the benefits are never guaranteed.
Another point that some people overlook is the negative long-term impact of transaction fees and account costs, so it pays to hunt around for the best ISA stocks.
Is 15% CAGR attainable – or 10% or 5%?
All three are achievable, but even 5% can be harder than it seems, since in the long term (like 35 years) there will be bad years and good years in the market. Some very careful selection of stocks may be required.
And I think 15% is possible, but it’s more than most investors can earn from their ISA over time. Taking steps to become a good investor can help improve performance.
You want to share the best
Success stories can give us clues.
One UK share that left that 15% CAGR target in the dust Filtronic (LSE: FTC). It is high 2,406% in just five years.
It’s easy to point to one key reason for that: Filtronic has won major contracts with SpaceX, a shareholder.
That means there is a risk of torture. If anything happens to sour that relationship, or SpaceX’s needs change, Filtronic’s revenue could drop.
But there’s a bigger question to be asked: why is SpaceX so excited to buy so many solid boosters from a small business based in the north of England?
It is not charity. Filtronic has identified that the aerospace market will grow and require some specialized components, which only a limited number of companies worldwide have the necessary expertise or capacity to produce. SpaceX came knocking because of Filtronic’s strategic choices.
It has invested in expanding its capabilities, ready to ride any climb that is wanted not only by SpaceX and other space companies, but also by other customers such as aerospace manufacturers.
It entered the second half of its financial year with a record order book and again shows “increase customer diversity” That can help reduce the risk of concentration I mentioned above.
Filtronic’s share price has risen because it has a compelling value proposition in a growing market. I see it as a share worth considering.
