The ‘real terms’ ISA millionaires

• Inflation is already a formidable foe, so there’s no sense in letting high fees add to the drag
• ISA millionaires could save £2,850 in investment platform fees in the first year alone, rising to £16,300 by year five, by taking advantage of ii’s flat fees.

Hitting the magic £1 million mark is a goal for many investors, but thanks to inflation, that milestone isn’t as dazzling as it once was. In real terms, £1 million today won’t stretch as far in the future, meaning investors will need to amass a bigger pot to achieve the same level of wealth.

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New calculations by interactive investor, the UK’s second-largest DIY investment platform, show that investors in their mid-20s aiming for today’s £1 million purchasing power at retirement would need to build an ISA pot of £2.2 million, once inflation is factored in.

Assuming annual inflation of 2% - the Bank of England’s target level - a 25-year-old investor would need to grow their ISA pot to £2,208,040 over a 40-year period until they reach the age of 65, one year before the UK state pension age.

Under the same assumption, an investor aged 35 would need to accumulate £1,811,362 over 30 years to have an ISA pot worth £1 million in today’s terms. For those aged 45, 55, and 60, the required ISA pot sizes are £1,485,947, £1,218,994, and £1,104,081, respectively.

Source: interactive investor. Assumes annual inflation of 2%.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The ISA millionaires’ club of tomorrow will have a higher entry fee. Those planning for the future must adjust their targets accordingly, because standing still in investment terms often means moving backwards in real terms.

“Inflation - the silent eroder of purchasing power - means that the cost of goods and services rises over time. What £1 million buys today will be significantly less in 20 or 30 years. Even at a relatively modest inflation rate of 2% a year, the real value of £1 million would be slashed by more than half in 25 years. In other words, an investor who aims to be a ‘millionaire’ in the future might need closer to £2 million to enjoy the same spending power.

“This is why simply saving isn’t enough - investing wisely is key. Assets that outpace inflation over the long term, such as equities, can help protect and grow wealth over the long term. While market ups and downs are part of the journey, history shows that long-term investors who stay the course tend to fare better than those who sit on the sidelines.”

How to limit the inflation drag with lower investment platform fees

With inflation eating away at the real value of money, investors need every advantage they can get to grow their wealth. While much attention is given to picking the right investments, one often overlooked drag on returns is the cost of investing itself.

Platform fees - what you pay simply to hold and manage your investments - can quietly chip away at your pot over time.

Calculations from interactive investor show that an investor with a £1 million ISA portfolio could save £2,856 in investment platform fees in the first year alone, rising to £16,300 by year five (assuming investment growth of 5% and four trades per year), compared to a 100% funds portfolio with Hargreaves Lansdown (HL). The saving compared to the equivalent portfolio with AJ Bell (AJB) is £737 in year one and £4,073 in year five.

For a portfolio split 50% in shares and 50% in funds, the savings amount to £1,675 in year one and £9,896 over five years compared to HL, and £786 in year one and £4,344 over five years compared to AJB. This assumes four trades a year — two share trades and two fund trades.

Cost savings on a £1m ISA pot with interactive investor vs competitors

Source: interactive investor. Compares the cost of 50/50 share/funds portfolios and 100% funds for HL and AJB.  50/50 portfolios factors in the cost of four trades a year – two fund trades and two share trades. The 100% funds portfolio factors in four fund trades a year. Assumes 5% investment growth per annum.

Myron Jobson says: “Inflation is already a formidable foe, so there’s no sense in letting high fees add to the drag. interactive investor’s flat-fee platform is a no-brainer for ISA millionaires, allowing them to keep more money in their pocket and compounding for the future.”