Claire reinvests her £5,000 annual HMRC refund into a stocks-and-shares ISA at 8% returns over 18 years, growing it to roughly £200,000. Priya doesn't reinvest hers. After 18 years, Claire has £1.2 million in total wealth versus Priya's £800,000, a £400,000 gap built entirely on what they did with the refund.
Here's where it gets even a bit crazy. Remember that £5,000 that Claire was getting back from HMRC every year from her Self Assessment? What if she does not spend it? What if she puts it straight back into stock and shares ISA? Now, that £5,000 per year into an ISA for 18 years at the same 8%, that will grow to £202,231. So let's just say £200k. So Claire's total wealth will be around £1.2 million, while Priya will be about £800K. The total gap is massive, like £400,000. Okay, the same income but just different approaches to investing. So Claire ends up £400,000 wealthier than Priya simply because she funded the pension first and put the money HMRC gave her back, back to work, and that made a massive difference.
