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Is it better to use your ISA allowance early in the year? The stats say yes

11 July, 2017

Were you one of the eager beavers making your last-minute ISA decision at five minutes to midnight on the 5th April? If you were, you weren’t alone. Hargreaves Lansdown reported that 1.07m people checked its website in the last seven days of the 2018/19 tax year, and it took 2,250 calls after 5.30pm on the deadline day. Late is certainly better than never, but early… early can set you up for far bigger gains. Around £20,000 over ten years.

As ever, the usual caveats apply. Nothing is guaranteed with the stock market etc etc. But here’s some food for thought…

Leaving your ISA to the last minute is certainly a lot better than not doing it at all – unlike pensions, your ISA allowance works on a ‘use it or lose it’ basis and can’t roll on to future years, so it makes absolute sense to use your allowance where possible.

However, it may be worth trying to get ahead of yourself for this tax year. There is a wealth of data that shows that you’re far better off investing early in the tax year where possible, rather than burning the midnight oil in February or March.

Fidelity calculations show that if investors had put their full ISA allowance to work at the start of each tax year rather than the end for the past ten years, they’d be £20,000 better off.

Emma-Lou Montgomery of Fidelity Personal Investing said: “Our calculations show that if you invested your full ISA allowance into the FTSE All Share on 6th April each year and had done so every year over the past ten years, your original investment of £136,360 would have grown to £199,832. If, though, you had waited until the very last day of each tax year on 5th April to invest your full ISA allowance into the FTSE All Share every year, that £136,360 you had invested would be worth just £179,611 after 10 years - that’s £20,221 less.”

Why is investing earlier more effective?

The first reason is that many investments generate an income. A stocks and shares ISA, for example, will often pay dividends. The average FTSE 100 company pays a dividend of just over 4% per year. If you leave your investment to the end of the tax year, you’ve missed out on that income for a whole year. On a £20,000 investment, that’s £800, which then compounds over time.

A second reason is that markets tend to go up. The FCA isn’t keen on people saying that because, of course, it shouldn’t be assumed. However, historically, the stock market has gone up in more years than it has gone down (12 versus 8 for the FTSE 100 over the past 20 years). That means that if you invest at the end of the tax year, you may well miss out on stock market growth as well. (Though, of course, you might also avoid a crash… nobody can ever say for sure.)

Should you invest a lump sum or top up gradually?

Many of us won’t have great big lump sums to invest at the start of each tax year. And even if you did, it might not be advisable to stick that much in the stock market all in one go – you leave yourself vulnerable to the market taking a sudden nosedive. While financial markets usually recover, no-one wants that type of rollercoaster ride. However, the Fidelity research shows that drip-feeding your money into your ISA with a regular saving every month would still get you a better return than investing it all at the last minute.

Fidelity’s number-crunching shows that splitting the annual ISA allowance into 12 monthly investments, that £136,360 pot would have grown to £192,500. Some £12,889 more than if you had waited until the last minute to invest the full sum.

There is another, important advantage to investing early: it gives you time to think. If you’re investing at five minutes to midnight on 5th April, the chances are you’re not making the most considered investment decision. It’s far better to take a little time to think about where you might want to invest, rather than chucking money into whatever investment looks OK at the time.

So make a resolution this Spring to invest regularly, using your ISA allowance throughout the tax year rather than having a last-minute scramble in the first few days of April 2020. Not only do you have the potential to make a better decision, you have the potential to grow your wealth faster over time.