Every year we see the same annual rush, as investors scramble to use their annual tax-free ISA allowance before the midnight deadline on 5 April. ISAs are issued on a ‘use it or lose it’ basis, which means that if you don’t use your allowance by the annual deadline, you have lost it for good.
Last-minute miracle
Investors were expected to shelter a massive £2.5bn from the taxman in stocks and shares ISAs in the final week of the tax year, according to Hargreaves Lansdown. Other research suggests that more than one in five ISA sales are made in the final days, as investors finally get their act together after 12 months of doing little or nothing.
Now your 2017/18 allowance is here, and this year it is a whopping £20,000. Most people won’t be able to save anything like that much, but you should still save all you can afford. But please, this time, don’t wake up to this opportunity at the last minute. New figures show that early-bird ISA investors really do catch the juiciest investment worms.
Compound for pounds
Fidelity Personal Investing says that an early-bird investor could be £8,500 better off than someone who left it until the last minute. Somebody who had invested their full ISA allowance into the FTSE All Share at the start of each tax year for the last decade would have seen their investment of £110,560 grow to £167,121. By contrast, somebody who waited until the very last day to invest exactly the same amount would have just £158,551, that’s a painful £8,570 less. The reason is obvious, the longer your money is in the market, the more time it has to benefit from rising share prices and re-invested dividends.
Investing your full allowance at the start of the year will be harder this time round, as only the lucky few will have £20,000 to hand. However, you can always invest much smaller sums, or set up a regular monthly payment. Somebody who invested their full allowance in 12 monthly segments over the last 10 years would have £164,616, which is £6,065 more than the last-minute investor.
The big drip
As Fidelity’s investment director Maike Currie points out, making smaller, monthly contributions also reduces your exposure to market volatility. “By drip feeding your money into the market, you will benefit from a process known as pound-cost averaging. This means that you buy more units in your investments when prices are low and fewer when prices are high which can help to cushion your portfolio from dips in the stock market.”
The message is clear: if you have money to save in your ISA allowance, there is no point in hanging around, quite the reverse. Do not hold off in the hope of finding a better market opportunity. It may not come, and even if it does, there is a fair chance you will miss it. Whether you plan to buy individual company stocks or low-cost tracker funds such as ETFs, now is the right moment. Time is money, especially when it comes to investing.