Early bird ISAs: Be the first in the queue
Why wait until the end of the tax year to use your ISA allowance?
If you have the cash to hand, squirreling it away sooner rather than later makes you less likely to squander it - and could see you benefit from a bigger pot over the long run.
This year, you can take advantage of an increased allowance, which rose by £600 to £11,280 from 6 April. Of that, up to £5,640 can be placed in cash.
According to a study by Fidelity Worldwide Investment for Moneywise, ISA investors could benefit from £375 more growth over 13 years by investing before the end of April each year, rather than waiting for the following March. The analysis assumed the full ISA allowance was invested in the FTSE All-Share index every year over 13 years.
This gain may not sound overly impressive but it all depends on market timing, and previous years have demonstrated the difference can be impressive.
For example, the same study from Fidelity in 2010 showed an early-bird investor's fund would have grown by an additional £7,000, when compared to the last-minute investor's, if it had been invested over 15 years.
Yet out of the total of £3.7 billion invested in stocks and shares ISAs during the 2010/11 tax year, more than a quarter was invested between 1 March and 5 April as people rushed to use their allowance in the last month, according to the Investment Management Association.
Delay could cost you money
Waiting until the end of the tax year means your money doesn't have as much time to grow in the market and it isn't sheltered from the taxman, with 12 months of tax-free interest or growth, as it would have been if you had got in early.
According to comparison site moneynet.co.uk, if you invested the full cash ISA allowance of £5,640 for a year at 3.5% - the current easy-access top rate you'd earn £197.40 tax-free. However, if you delayed your decision until two months before the end of the tax year, this would reduce to £32.90.
But, against that, companies tout for your cash at the end of the tax year and will offer some of their best rates then.
Does it always make sense to invest early?
"The banks launch their new deals about three to four weeks before the tax-year crossover - but those accounts are usually still available for at least the first month of the new tax year," says Andrew Hagger, spokesperson for moneynet.co.uk.
"If you wait until the summer, you may find some of the best deals have been withdrawn or the rates cut slightly as demand has fallen away. You may get 0.5% to 1% less 'out of season' and have fewer products to choose from," he adds.
What about stockmarket investing?
If you are new to stockmarket investing, knowing where to start with your ISA allowance can seem daunting. However, it's simple to open a stocks and shares ISA for a first-time investor.
You could opt to pick a portfolio through a fund supermarket, enabling you to buy funds online as well as over the phone. But, before doing so, decide on your risk profile and timescale for investment in order to choose suitable funds. One option is to choose a tracker fund to combat a lack of investment know-how and avoid paying hefty management fees.
A good-quality managed fund is another option for inexperienced investors as you can rely on the experience and expertise of the manager. It can be tricky deciding when to jump into the stockmarket with a lump sum, so you could invest monthly to ride out the highs and lows.
Setting up regular payments into a stocks and shares ISA is simple and allows you to benefit from 'pound cost averaging', meaning your contributions buy more stocks and shares when share prices are down and fewer when they're up, protecting you against sharp market downturns.
As with stocks and shares investments of any kind, you should ideally be prepared to invest for at least five years and be able to handle the prospect of your returns going down as well as up. If you're likely to need access to the capital in the near future, you
should keep it in cash.
Finally, it matters less when you invest your ISA allowance and more that you use it in the first place.
So rather than wasting time trying to work out the best timing, simply pick a sum that you can afford and slot it in one of these tax-efficient wrappers.
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.