EXCLUSIVEInvesting your Isa allowance at the start of the tax year - rather than the end - could make you £32k richer
- New research shows the difference in returns over a decade
Investing your total stocks and shares Isa allowance at the beginning of each new tax year can get you a significantly higher return than leaving it until just before the deadline, data reveals.
The annual Isa allowance of £20,000, invested in global equities at the beginning of each tax year, would have amassed £338,333 from a £200,000 investment over the past ten years, according to figures from St James's Place shows.
In comparison, £20,000 investments made at the end of each tax year over the same period would have returned £306,476 - or £31,857 less.
The figures are based on an investment made into the MSCI World Index.
Claire Trott, divisional director for retirement and holistic planning at St James's Place, said: 'Many people rush to max out their Isa allowance at the end of a tax year and then forget about investing again until the following April, missing out on almost a year of tax-efficient returns.'
Of course, a £20,000 lump sum at the beginning of each tax year isn't a feasible deposit for most retail investors.
Early bird catches the worm: Investing at the start of the tax year can boost your Isa returns in the long term, according to research by St James' Place
For those that can't afford to make a big lump sum deposit at the start of the financial year, Trott says: 'Spreading investments regularly across the year is also a wise move.
'Not only can this generate higher returns than leaving it to a lump sum payment at the last minute, but it also removes some risk if markets fall in value in the short term.'
While the returns of regular investing throughout the course of a year won't deliver the same result as a lump sum invested at the start, they will beat those of a last-ditch investment.
SJP's figures show that someone investing £20,000 via regular deposits throughout the year would have seen returns of £314,453 over the course of ten years, compared to the £306,476 a last-minute investment would deliver.
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Trott said: 'While the most important thing is to use your allowance at some point in the tax year, it does pay off to do this as early as possible, if your circumstances allow.'
However, Trott warns that many hold on to their funds until the end of the tax year for fear that they might need to access them.
She said: 'People are conscious of locking money away when the world is so volatile.
'Now I think people like to have a bigger rainy-day fund and keep it until they get towards the end of the tax year.'
| Final Value of Investment | ||||
|---|---|---|---|---|
| Tax Year | Total Investment | Early bird Isa investors | Last minute Isa investors | Regular Isa investors (allowance invested each month) |
| 2015/16 | £15,240 | £35,474 | £35,274 | £36,581 |
| 2016/17 | £30,480 | £81,762 | £70,022 | £75,794 |
| 2017/18 | £50,480 | £117,759 | £104,928 | £110,107 |
| 2018/19 | £70,480 | £151,328 | £136,029 | £142,086 |
| 2019/20 | £90,480 | £190,843 | £178,775 | £180,263 |
| 2020/21 | £110,480 | £230,561 | £209,959 | £215,167 |
| 2021/22 | £130,480 | £260,458 | £236,732 | £243,259 |
| 2022/23 | £150,480 | £288,168 | £264,167 | £271,314 |
| 2023/24 | £170,480 | £315,525 | £286,476 | £296,721 |
| 2024/25 | £190,480 | £338,333 | £306,476 | £314,453 |
| Source: St James's Place | ||||
By doing so, many will see the value of their cash eroded by inflation, especially if they hold it in a current account earning little to no interest.
Trott said: 'Whatever you do with [your money], doing something is better than doing nothing.
'A lot that comes down to how much risk is someone willing to take, how much they can afford to invest in the stock market and what sort of funds they're looking to invest in as well.'
She added: 'Make sure that it's working for you.'
Advice can help
Investing for the first time can be a daunting prospect, meaning that many are likely not making use of their Isa allowance at all, or to opt for a cash Isa instead of stocks and shares.
According to Trott this is partially due to a lack of understanding of how investing works.
Choosing to get advice from a professional can help to demystify investing, and prevent investors from making rash decisions.
Trott said: 'You tend to be more confident when you've got an adviser than when you're necessarily going out and doing it on your own because again, with the volatility that we see out there, and if you haven't got an advisor, it can make you nervous.
'It can make you pull out of the stock market when you shouldn't, or we've seen people making poor decisions when they haven't got someone to bounce ideas off.'
'It doesn't have to be expensive,' Trott said, 'There are a lot of resources out there… going to a good, trusted resource can help you understand what you're doing, what the implications are and what risks you're taking, so that you aren't going in blind.'
However, many investors, especially those with more experience, are comfortable managing their portfolio themselves using DIY platforms.
You can read This is Money's guide to these below.
