THE INVESTING SECRETS OF ISA MILLIONAIRES

For a long time, ISAs have been viewed as the first port of call for investors looking to save for the future. It’s easy to see why – ISAs offer a range of fantastic benefits including their tax-efficiency, flexibility and simplicity.

In this fact sheet, we explain how ISAs allow you to shelter considerable sums from the taxman by profiling three Hargreaves Lansdown clients who have built up ISAs worth over £1 million by investing in the stock market.

ISAS – THE BASICSAn ISA, or Individual Savings Account, is not an investment in its own right. The best way to think of an ISA is as a ‘wrapper’ in which investors can shelter savings and investments from tax. Within an ISA investors pay no capital gains tax and no UK income tax on income or interest. They don’t even need to be declared on a tax return, and less tax means higher returns.

Any UK resident aged 18 or over (16 for Cash ISAs) can invest. There is no upper

age limit and investors can withdraw their savings whenever they need to. Best of all, it often costs no more to place cash or investments inside an ISA, so many investors receive these benefits free. Used regularly, the annual ISA allowance offers the chance to create a substantial portfolio sheltered from the taxman, although remember tax rules can change, and the benefits will depend on individual circumstances.

TWO MAIN TYPES OF ISAS Cash ISAs – Cash ISAs operate just like a normal savings account except the interest is tax-free. Interest rates will vary, so shop around for the best deal using the best-buy tables which can be found in the press or online. Do watch out for headline grabbing introductory rates or temporary bonuses though, as when these disappear savers can be left with an unattractive rate.

Stocks and Shares ISAs – Those prepared to accept more risk for potentially higher returns might consider a Stocks and Shares ISA. Within a Stocks and Shares ISA investors can choose from a range

of investments including funds, shares, investment trusts, ETFs, corporate bonds and gilts, so investors can take as much or as little risk as they are comfortable with. Remember unlike cash all investments can fall in value as well as rise so investors could get back less than they invest.

£20,000 ALLOWANCEWhen ISAs (formerly PEPs) were first introduced in 1987, each individual could only contribute a maximum of £2,400 each tax year. Today, investors can shelter up to £20,000 from the taxman (2018/19 tax year) meaning a couple can protect £40,000 of their savings and investments from tax.

The generous ISA allowance from the government means individuals and couples can build significant tax-efficient sums by tucking money away in an ISA each year.

The ISA allowance can be split as you wish between a Cash ISA and Stocks & Shares ISA, as long as you stay within the overall £20,000 annual allowance.

Important Notes: If you choose to invest within an ISA, just remember that investments can go down as well as up in value, so you could get back less than you put in. The information in this guide was correct as at 6 April 2018. ISA tax rules can change, and their benefits depend on your circumstances. We wrote this guide to give you useful information about ISAs, but it’s not personal advice. Ifyou’re thinking about investing and you’re not sure if a particular investment is right for you, please ask for advice. All investments should be held for the long term as their value and income can fall as well as rise, therefore investors could get back less than they invest. The HL Multi-Manager funds are managed by our sister company Hargreaves Lansdown Fund Managers Ltd. This guide is issued by Hargreaves Lansdown Asset Management Ltd, who are authorised and regulated by the Financial Conduct Authority. April 2018

It is estimated there are around 200 investors in the UK who have built ISAs worth over £1 million by investing in a Stocks & Shares ISA. These investments are sheltered from tax meaning there is no further income tax to pay or capital gains tax to pay on the investments.

In this fact sheet, we profile three Hargreaves Lansdown clients who have built up ISAs worth over £1 million by investing in a Stocks & Shares ISA. They share their stories explaining their reasons for investing in ISAs as well as their investment strategies. They also provide a selection of tips for ISA investors to help them on their investment journey.

The ISA millionaires all asked to remain anonymous for this fact sheet so we have referred to them as ‘Mr C’, ‘Mr L and ‘Mr M’. While all their stories differ, there are recurring themes to their ISA success

which crop up again and again. These include the importance of:

• Contributing the maximum amount to your ISA each year

• Investing as early as possible in the tax year

• Not procrastinating – open and invest an ISA as early as possible

• Picking investments for the long-term (over five years)

• Remaining patient in tough markets

• Researching your investments

• Not overtrading

We hope you enjoy the investing stories of our ISA millionaires and they provide an insight into what it takes to become a successful investor.

INTRODUCING THE ISA MILLIONAIRES

MR F FROM NORTHYORKSHIRE

MR L FROM SUFFOLK

MR MFROM ESSEX

When did you start your ISA?1987 (when PEPs were introduced)

1987 (when PEPs were introduced)

A few years after PEPS were introduced

Why ISAs?• Tax benefits (great way to

generate tax-free income for retirement)

• Tax-efficiency (tax-free income for retirement)

• Tax benefits (No capital gains or further UK income tax)

Income/Growth strategy Income/Growth strategy Income Growth

Fund or shares? Shares (including ETFs and REITs) Shares Mixture

Income/Growth strategy‘Be calm and invest for the long-term’

‘Try not to chase the story’ ‘Investing is for the long-term’

SUMMARY OF THE ISA MILLIONAIRES

MR C FROM NORTH YORKSHIRE

Q: Why do you invest through ISAs?A: I invested in ISAs from the moment they originally launched (as PEPs). I was already an investor in the stock market before then having learned about investing at my grandfather’s knee and when ISAs came along, they were ideal. ISAs were initially designed to encourage more people to invest in the stock market but for people like me, it just meant I could pay less tax on my investments. I first opened an ISA for myself, my wife and my mother, and when my children were old enough, I opened ISAs for them too. In recent years, I’ve also opened Junior ISAs for my grandchildren so they can save tax on their investments in the future.

The main benefit for me is that ISA investments are sheltered from UK income tax and capital gains tax. This was particularly important when I first opened an ISA as tax rates were higher then than now, though the tax benefits of ISAs still apply today.

I put in the maximum amount each year and as soon as possible after the tax year begins. There’s a lot of rushing around at the end of the tax year before the deadline closes but I try to do it at the beginning of each tax year. The earlier you can invest, the longer you have for your investments to grow and benefit.

Q: What investments do you hold in your ISA?A: I hold 100% of my ISA portfolio in equities (shares). I have subscribed to a particular weekly magazine for decades and get most of my share ideas from there. I don’t always agree with their recommendations but they put down the facts (such as several years of dividends and earnings per share) that I need for making my investment decisions.

For some more obscure investments, I will sometimes choose funds. For instance, I wanted exposure to Turkey and Vietnam at one time so I bought funds specialising in those countries. I’ve also bought several real estate investment trusts (REITs) which seem particularly suitable for ISAs because of their high yields.

The rules allowing AIM shares to be held in an ISA are very helpful. It used to be bad news when a company switched from the main market to AIM as you weren’t allowed to hold AIM shares in an ISA; you were forced to sell them. I missed out on some big gains as a result, so I could have done even better with my ISA had the rules been as they are now.

Q: What are the keys to successful investing?A: I believe the stock market is sometimes quite slow to react to good news. Sometimes, I’ll look at a company announcing good results and nothing will happen to the share price. It will then take a week or so for the market to react and the stock to rise. This can present some useful opportunities.

Other than this, I do a quarterly valuation of my ISA to measure performance of each investment, both in absolute terms and relative to the market as a whole. I think it is a good discipline for investors. Also, every now and then, I do have a spring clean of my investments to clear away the low-value clutter. At the moment, I have 32 shares in my ISA and there are several small investments I should probably get rid of.

This is not to say my investing life has been a total success – I’ve had some complete disasters along the way but this is part of long-term investing. I do think it’s important not to become faithful to particular shares and you should sell them if they are not doing what you expected them to do. Too often, I have ignored warning signs and ended up with a worthless holding.

Q: Do you have any tips for ISA investors?A: Be calm. If you are investing in shares, you should do it for the long-term and not worry too much about the short-term noise. The greatest lesson I ever learned was when, as a young boy, I was reading the Financial Times with my grandfather and used to get excited that a stock had gone up. However, he used to say ‘that’s only one day and it’s how they do over

the long-term that matters’. That was good advice.

I am not a trader and generally try to select investments that I want to hold for five years or more. If share prices do fall, I look to add to my holdings instead of running towards the exit. I can’t promise that this strategy will work for other people but it has served me well.

Q: What is your experience of using Hargreaves Lansdown’s ISA?A: My own stockbroker didn’t actually do ISAs at the time they were launched so I opened an account with my bank. However, the bank started putting its prices up so I looked around for another provider. Hargreaves Lansdown is just so much simpler and infinitely cheaper than my previous ‘full-service’ stockbroker and now I manage all my family’s ISA and non-ISA investments through the Vantage service.

MR L FROM SUFFOLK

Q: Why do you invest through ISAs?A: ISAs were originally called PEPs (Personal Equity Plans) when I initially chose to invest and at the time, it seemed like a good idea. Back when Nigel Lawson introduced PEPs, I started contributing the full amount immediately.

The main reason I started investing in ISAs was due to their tax-efficiency. Early on, the tax savings don’t make much difference but once you get going and build a bigger ISA portfolio, it makes a considerable difference. Now I’m retired, it has a big impact on the amount of income I receive from my ISA.

MR C’s ISA TIPS:• Contribute as early as possible

in the tax year to allow your investments to grow

• Conduct a quarterly valuation of your ISA to make sure it’s on track

• When investing for the long-term, don’t worry about the short term noise.

MR L’s ISA TIPS:• Over time, the tax savings of

ISAs make a big difference• Don’t overtrade the

investments in your ISA – it can affect your returns

• Try not to chase the latest investment story. Instead, look at a company’s fundamentals.

Q: What is your investment strategy?A: My investment strategy has changed over the thirty or so years that I’ve been investing in ISAs. I began investing around the time Jim Slater brought out his book, the Zulu Principle, and I decided to follow a growth investment strategy.

Now that I’m nearing retirement, the way I choose to invest my ISA has changed. I mainly invest in income-bearing shares on the basis that if the stock falls, I can at least take the income. I haven’t started taking an income from my ISA yet but I expect to do so in the next couple of years and it will account for around 50% of my total income.

Q: What are the keys to investing success?A: In my experience, picking good value shares and not overtrading – I strongly believe actively trading is bad for your portfolio. Depending on the size of the share you buy, you can lose 0.5% every time you trade meaning if you trade that stock twice a year, that’s 1% gone immediately.

Most of the time, I simply try not to chase the story and work off the fundamentals.

Q: Are there any investments you like currently?A: It’s actually more about what I don’t like at the moment – and that is oil and mining shares. That’s not to say I don’t think one should be investing, just that these are the areas of my ISA which have performed poorly recently. I will continue to hold onto my oil and mining shares for the time being.

Q: When did you become a HL client and why?A: The main reason was security. I used to hold my ISA with another provider who previously spread the cash in the account between five different banks. However, the company then changed the way they treated cash and decided to put all their client’s cash into a single bank. As there was a possibility that I might have more than £80,000 cash in my ISA at any one time, I decided to transfer to Hargreaves Lansdown and I have enjoyed the service since then.

MR M FROM ESSEX

Q: Why did you initially invest through ISAs?A: I first invested in ISAs a couple of years after they launched when I realised they were for the long term and any future capital gains and income would be tax-free.

I use my full ISA allowance each year and put the cash in at the start of every tax year. I don’t necessarily invest the money straight away but I make sure it’s in my ISA ready for an investment opportunity.

Q: How would you describe your investment strategy?A: I read lots of investment articles and broker ratings on an ongoing basis. I use this research to note down shares or funds which look attractive. I’ll continue to watch these and if they suffer a setback I’ll look to take advantage and invest.

One area I currently like is emerging markets as I feel over the long term these economies will grow more quickly than the developed world. I try to buy in this (higher risk) area when it has fallen out of favour, as it did in the aftermath of Donald Trump’s election in November 2016. When I invest in areas like emerging markets and Japan, I tend to invest via collective pooled investments, such as funds and investment trusts. This is because while I like these areas, I don’t know them well enough to pick individual companies to invest in, so I’m happy to leave it to a professional.

Similarly, I like the biotech and technology sectors as I believe stocks in these sectors have huge potential. However, I don’t know the companies well enough so I’d rather leave it to a professional to find the next Apple or Amazon.

If I feel I know a company well enough I’ll buy individual shares. I tend to buy shares in large companies in the UK, Europe or the US. At the moment one long-term view I have is that people in emerging markets will increasingly aspire to Western lifestyles, so I hold large consumer staple companies that have strong international presences and can sell their products all over the world.

Q: What have you used your ISA to save for?A: I’ve used my ISA for long-term savings and to build a nest egg to help fund my retirement. I’m now retired and I plan on spending my wealth outside my ISA before I touch my ISA.

I don’t think there is any point in having savings outside of an ISA unless you can save more than the ISA allowance.If you’ve got money that you won’t touch for five years then it makes sense to have it in an ISA. Not only because it is more tax-efficient but I’ve found that in my ISA I tend to make longer-term investment decisions which have performed better than savings outside of my ISA.

Q: What top tip would you give ISA investors?A: Don’t overly worry about timing the market and try not to trade too frequently. Investing is for the long term. You should buy something that if you had to put it away in a box for 10 years and forget about it you would be happy to hold it for those 10 years. Don’t buy something simply because you think it is cheap and you’ll be able to sell it for 20% profit in 3 months’ time.

MR M’s ISA TIPS:• If you have money you won’t

touch for at least five years it makes sense to have it in an ISA

• Don’t worry about timing the market

• Invest for the long term.

1. Easy to set up. Start an ISA online in minutes. Please note, the Vantage Service is designed for clients who like to make their own investment decisions.

2. UK’s number 1 ‘investment supermarket’. With more than 35 years experience helping investors, we are trusted with over £86 billion by over 1 million clients.

3. Competitive charges. Just 0.45% p.a. (capped at £45 per year for shares) to hold investments and no charges to buy and sell funds. Click here to view our ISA charges

4. Fantastic customer service. 96%* of our clients rate our service as ‘good’, ‘very good’ or ‘excellent’.

5. Wide investment choice. Choose from over 2,500 funds as well as shares, investment trusts and more.

* Hargreaves Lansdown Client Satisfaction Survey, November 2016, 712 respondents

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