FOR the savvy investors, investing the yearly ISA allowance into share-based investments each tax year could produce a £1m nest egg by 2039, writes Oliver York at Brewin Dolphin in Newcastle.

Most people fail to utilise the full allowance which is provided to each individual by the government.

Under current ISA rules, the returns would also be tax free, with no income tax or capital gains tax (CGT) liability. The compounding effect of regular investing over the long term using the allowances should not be underestimated.

The analysis follows the Budget announcement that the annual ISA allowance will be significantly increased to £20,000 in the 2017/18 tax year, up from £15,240 currently.

Investment returns of 5 per cent a year (income and growth combined) could produce a total ISA fund of £1,012,307 by 2039. Of this total, £451,087 would be investment profit, on overall contributions of £561,220. However, the projection does not take into account inflation, which has the effect of reducing the real value of your investment.

In practice, the investment returns could also be more or less than in this example.

Calculations show how keeping your ISA savings in cash over the long term could be much less profitable. For example, a saver putting their allowance into a cash ISA each tax year and earning an interest rate of 2 per cent could accumulate a tax-free sum of £704,263 after 23 years. Of this total, the overall interest earned would be £143,043 – less than a third of the profit in the stock market ISA example.

To amass £1m from investing in cash ISAs could take 29 years – an extra six years compared to the stock market ISA example - and require total contributions of £756,264.

All the above projections assume an investor uses their full ISA allowance each tax year - £15,240 currently and £20,000 in 2017/18 - with the contribution limit increased by 2 per cent annually thereafter to represent inflation linking.

PLEASE note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.