Early ISA investors reap greatest rewards
Investors could be £7,000 better off by sorting out their individual savings account early in the tax year instead of leaving it until the last minute.
In an analysis undertaken for Moneywise, Fidelity International showed ISA investors could generate £7,000 more growth over 15 years by investing before the end of April each tax year, rather than waiting until the end of March.
The study assumed the full PEP (predecessor to the ISA) or ISA allowance was invested in the FTSE All-Share Index every year for 15 years. By the end of the period, early bird investors’ total capital had grown from the £101,400 invested to £149,249.90.
For last-minute investors, an investment of the same total capital had grown to only £142,243.35.
Rob Fisher, head of personal investments at Fidelity International, says: “Investing earlier rather than later in the tax year simply gives your money more time to grow in the market over the long run. Put another way, more of your money is sheltered from the tax man.”
Additional gains could be found for early bird ISA investors choosing a more aggressive, actively managed fund. For example, if an investor had put their full allowance into the Fidelity Special Situations Fund by the end of April each year for 15 years, they would now have an investment worth £257,222.65.
If they had waited until the end of the tax year in March, however, their investment would be worth only £226,514.53 – that’s a difference of £30,708.12 in growth.
Francis Klonowski, independent financial adviser at Klonowski & Co, says: “If you’ve got the money there it's better to put it in an ISA at the beginning of the tax year rather than wait until the rush at the end. This gives you 12 months tax-free interest or growth.”
According to a survey by Fair Investment Company, an online financial services provider, 36% of investors make a lump sum payment at the end of the tax year.
On the 6 April this year, the annual ISA allowance increased to £10,200 for everyone over the age of 18, £5,100 of this total can be kept in cash.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.