Here’s how I’d start building a £1m ISA from scratch this September!

As summer’s relaxing days fade into memory, our writer gets serious about turning an empty ISA into a million pound retirement pot.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

2024 year number handwritten on a sandy beach at sunrise

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As the summer holidays draw to a close, many people will return to their daily lives reinvigorated and ambitious about the coming year. Stepping aside from short-term goals, what about longer term financial plans? For example, if I started now, could I build my Stocks and Shares ISA into a million pound retirement pot over the next couple of decades?

I believe I could. It is not guaranteed, of course. But here is how I would go about it.

Long-term wealth creation tool

First things first. Let me explain the role of my Stocks and Shares ISA here. The ISA could help me build a retirement fund in a tax-effective way.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

I would be able to invest £20K each year in my ISA. That is a sizeable sum, but if I want to aim for a million I need to be willing to save and invest at a meaningful level.

My first move would be to decide which Stocks and Shares ISA seemed best-suited to my own needs. There are lots of different options to choose from.

Getting more back than I put in

Still, even if I put in my full £20K allowance annually for 20 years, that would give me £400K – far short of my target valuation.

I would hope to close the gap by putting the money in my ISA to work in the stock market. If I could growth my ISA value by a compound annual rate of 8.8%, my account would have a million pound valuation after 20 years.

How to aim for long-term growth

That might not sound like a challenging target. But remember, I am investing for the long term, through both good years and bad.

Still, I think it is achievable. It could be possible to hit that target through growth shares, income shares or a combination of both.

What matters in my view is that I buy into outstanding businesses that I think can produce outsized returns over time, thanks to strong commercial prospects and an attractive share price when I invest.

One share I hold

As an example, consider one of the shares I own in my ISA: investment trust Income and Growth (LSE: IGV).

Over the past five years, the share has fallen 10%. That may not sound like the stuff of investor dreams! But during that period, it has paid out 49.5p per share in dividends, which is around 70% of the present share price.

By investing in small and medium-sized companies and holding the shares while they (hopefully) grow, Income and Growth has been able to generate sizeable cash flows that have allowed it to pay juicy dividends. It targets at least 6p per year in dividends, around 8.5% of the current share price, but often pays more.

No company’s dividends are ever guaranteed and there is a risk that Income and Growth’s investments underperform, hurting cash flow.

But its proven management team and simple, lucrative strategy mean the share, currently yielding 15%, share has earned a place in my ISA.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in Income & Growth Vct Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »