ISAs – It Doesn’t Take a Genius…

Even though Albert Einstein was not considered the foremost mathematical mind of his day (although he was no slouch), he could easily calculate the value of compounding, allegedly hailing it as the “8th wonder of the world”. Whether that is true or not, when you combine compounding’s notable attributes with the qualities of an ISA, the benefits are beyond dispute.



It is worth assessing exactly how much ISAs can accumulate for you over time. Below we look at the compounding effect of an investment across three scenarios: within an ISA with Netwealth, within an ISA but paying 1% more in fees, and outside of an ISA. For each example, we consider a married couple both contributing £20,000 a year for 20 years.

 

The couple invests £20k a year in an ISA at Netwealth’s Risk Level 7 (as it’s a long-term investment). As you can see, there are a range of potential outcomes, but broadly:

 

  • A strong rate of return (7.8%) would grow the investment to £2,092,815 by Feb 2041
  • An average return (5.6%) would produce £1,591,570 by Feb 2041
  • A weak return (0.7%) would produce £908,972 by Feb 2041

 

Investing in an ISA through Netwealth

 

 

Source: Netwealth

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.

 

If the couple invest the same amount, but pay 1% more in fees (which is typical with traditional wealth managers) there are also a range of potential outcomes:

 

  • A strong rate of return (7.1%) would grow the investment to £1,915,630 by Feb 2041
  • An average return (4.8%) would produce £1,450,142 by Feb 2041
  • A weak return (-0.3%) would produce £815,550 by Feb 2041

 

Investing in an ISA and paying 1% more in fees

 

 

Source: Netwealth

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.

 

Finally, if the couple invests outside of an ISA in a general investment account, and the basic rate of tax is applied (but with lower fees as per option one), the range of potential outcomes looks like this:

 

  • A strong rate of return (6.2%) would grow the investment to £1,714,229 by Feb 2041
  • An average return (4.0%) would produce £1,318,692 by Feb 2041
  • A weak return (-0.9%) would produce £763,917 by Feb 2041

 

Investing outside of an ISA

 

 

Source: Netwealth

Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.

 

It is clear that investing in an ISA is the smart choice, and even better if you compound the benefits of lower fees. It is also worth noting that if the money is not invested at all, the pot would be worth £840,000 by February 2041 – making investing a far profitable home for your money in general, in the long run.

 

While ISAs for individuals and couples can make a big difference, you can amplify the benefits even further by considering ISAs for a whole family. With the Junior ISA annual allowance now at £9,000, a family of four can shelter £58,000 each year from the taxman. This amounts to a substantial sum after even 10 years as we show in this article.

 

A brilliant mind, and outcome

 

Albert Einstein, who was born on 14 March 1879, was said to have accumulated an estimated fortune of $1m by the time of his death in 1955. Of course, the value of his estate would have grown immensely since then due to income streams derived from intellectual property rights.

 

His enduring legacy continues. Gravitational waves, which Einstein predicted over a century ago, were finally discovered in 2017. And in February 2021, the properties of an element named after him, Einsteinium, began to reveal some of its secrets.

 

Yet if his $1m fortune – £360,000 in UK money at the time – was invested in 1955 (please allow us this quantum imaginative leap) without further contributions, but compounding by 5.8% a year, how much would it be worth today? By our calculations: £14.9m within an ISA with a wealth manager like Netwealth, £7.9m if invested in an ISA but paying 1% more a year in fees, or £7.6m if left to grow outside of an ISA.

 

All healthy sums – but if Einstein had the benefit of the right guidance when investing over the long term, which option would he choose? It doesn’t take a genius to work that one out.

 

 

Please note, the value of your investments can go down as well as up.

 

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