Avoid the rush
Investing your ISA allowance early in the tax year can prove rewarding over the long term.
The traditional last-minute dash will have seen millions of UK savers rush to beat the tax year-end deadline to invest their ISA allowance. And having done so, many will do the same thing as next April approaches.
Human nature dictates that we are often only prompted to act when faced with a deadline, particularly when it’s a ‘use it or lose it’ opportunity such as the annual ISA allowance. But there are a number of reasons why it makes sense to invest in an ISA at the start of the tax year instead.
“Perhaps most obvious is the peace of mind that comes from getting ahead with your ISA planning and avoiding any end-of-year panic,” suggests Phil Woodcock, Head of Investment Communications at St. James’s Place. “It also makes things simpler, as you don’t need to worry about any more tax returns for your investments once they’re held inside an ISA.”
However, what’s most important is to remember that investing is a long-term game; the longer you leave your money invested, the greater the chance of achieving better returns. Investing your ISA allowance at the start of the tax year gives your money up to an extra 12 months to grow.
Of course, you are not guaranteed to do better by investing earlier, but by doing so you can get your money working harder for longer in two ways.
The sooner you use your ISA allowance, the greater the potential tax benefit because your investment is sheltered from Capital Gains Tax and Income Tax for longer.
Similarly, your investment has more chance to benefit from compound interest – what Albert Einstein reportedly referred to as the ‘eighth wonder of the world’. “Over the long term, the opportunity to make gains on the gains you have already made can make a big difference to your future wealth,” says Woodcock.
The predecessor to the ISA was the Personal Equity Plan (PEP). By making full use of your allowances since their introduction, you could have invested as much as £250,760. But as the chart shows, by investing those allowances at the beginning of the tax year, rather than leaving it until the last minute, you could have achieved significant additional growth.
“Taking steps to minimise the impact of tax on your wealth should be a year-round activity, not something that we only think about in the last few weeks of the tax year,” says Woodcock. “Whether through investing a lump sum or by setting up regular savings, making an early start with your ISA plans is one way to shelter more of your money from the taxman.”
Source: Financial Express; figures based on the performance of the FTSE All-Share Index, including reinvested income. Assumes investment of the full general PEP and ISA allowances since their introduction in January 1987, up to and including the 2017/18 tax year. Values as at 05/04/2018. ‘Early investment’ is from the beginning of May each year. ‘Late investment’ is the beginning of April each year. Please note that you cannot invest directly in the FTSE All-Share Index.
Past performance is not indicative of future performance and the value of your investment, as well as any income, can go down as well as up. You may get back less than you invested. The value of an investment with St. James’s Place will be directly linked to the funds you select and may fall as well as rise. You may get back less than you invested.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may be subject to changes in legislation in the future. The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
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