Becoming an ISA millionaire might seem like a distant dream for many, but it is feasible. While it will certainly take time and discipline, it’s quicker to get there if you invest in a stocks & shares ISA (individual savings account) and make the most of your annual allowance – which currently stands at £20,000¹ a year.

Just how feasible it is comes down to the amount of money you're able to put away into your ISA, the level of investment risk you’re comfortable taking, but also the fees you pay. Saving enough money can be difficult in itself, so why would you want to make it even harder by giving away a large chunk of your returns in fees?

This is something to think about as we approach the end of the tax year and attention turns to using as much as possible of your 2023-24 ISA allowance – before it resets on 6 April. Because whether you're chasing a million, or have more modest ambitions, the management fees you pay can have a huge impact on your investment outcomes.

Think long term

First to consider is how long it could take to get to a million pounds. It's safe to say this isn't going to happen overnight. The maximum you can currently save in an ISA stands at £20,000 a year. So, even if you were able to save this amount every year, it would take a whopping 50 years if we were to assume zero returns. This is near-enough a person's entire working life!

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Even so, history shows that we can expect a positive return when investing in shares over the long-term², in which case it doesn't have to take this long. And if you're able to put away the maximum ISA allowance each year, you can get there even faster.

Compounding can also come into play here. This is when you earn returns on the money you invest as well as on the returns themselves. It is a relatively simple concept but can have a significant impact on your future wealth.

Imagine you earn 5% a year (a hypothetical rate) on an initial £20,000 investment. In your first year, you'd make £1,000. But in the second year, because you're now starting out with £21,000, your 5% return would make you £1,050 – and so on (minus any fees, of course).

Even if you never make an additional contribution, by the 20th year (if you also made no withdrawals) you could have earned over £30,000 in returns (less fees). Even better, your returns don't count towards your ISA allowance.

The cost of compounding 

There's a catch though – compounding can also work in reverse when it comes to your costs. At the very least, your costs will reduce the amount of positive compounding you can enjoy by taking away from your investment return.

An extra percentage point here and there might not seem like much but over time, the more you pay in fees, the less of your return you get to keep for yourself. Those small amounts really add up, and they could make a huge dent in your investment goals.

So, if your ISA aim is to save a million pounds, make sure to keep an eye on your investment bottom-line. Some ISA providers charge significantly more than others and not everyone is committed to bringing value to investors.

Take a look at the chart below, which assumes an annual £20,000 ISA investment with a 5.5% annual return for both scenarios. The light green line is a low-cost investment with fees of 0.5% a year, so a net return of 5%. The dark green line is a higher cost investment with fees of 2% a year, so a net return of 3.5%.

The low-cost investment takes just under 25 years to reach £1m, while the high-cost one will be worth only £779,000 at that point. It would take nearly 30 years to reach £1m with the high-cost investment, while at that point the low-cost investment would be worth almost £1.5m!

How long might it take to get to £1m?
 

^{Source: Vanguard calculations.}

Become a pension millionaire too

Investors can also aim for the same goal with their pension pot, which may be more attainable than becoming an ISA millionaire. The same principles of regular and cost-efficient investing apply, but contributions also benefit from tax relief³ so do not have to be as high - especially in the early days. Furthermore, unlike with an ISA, where you can cash in your investments and take your money out at any time, with a self-invested personal pension (SIPP), your money is locked in until at least age 55⁴, so there’s less chance of being side-tracked.

A 25-year-old who is willing – and able – to contribute just £100 a month into a low-cost SIPP and incrementally⁵ grow their contributions, for example, has the potential to hit the million-pound mark after 40 years. Find out how to become a pension millionaire – ideal if your goal is to retire early or to retire comfortably with a sizeable pension pot.

¹ 2023/2024 tax year.

² Stocks and shares have historically risen over the long term. UK shares, for example, returned 5.41% on average each year between 1900 and 2020 in real terms. Dimson-Marsh-Staunton global returns data from Morningstar, as at 31 December 2022. Data covers the period from 1901 - 2022. Returns are in local currency.

³ The government also tops up your SIPP contributions with tax relief, which means you get an extra £20 paid automatically into your pension for every £80 you invest

⁴ The minimum age at which you can access your pension will rise to 57 from April 2028.

⁵ See table How much more would you need to contribute to reach £1 million? to see additional monthly contributions needed.