The new tax year is upon us! We look at the potential benefits of investing early.
The ‘early bird’ ISA catches the worm
The vast majority of people won’t get around to using their ISA allowance until March 2020. Every year, investors scramble to use their annual tax-free allowance before the deadline on 5 April. Our data shows in 2018, when the ramp up to the end of the 2017/18 tax year began in February, 48% of ISA contributions happened within the ten days before the deadline*.
Whilst most of us don’t have £20,000 sitting around waiting to invest, by investing at the start of the year, rather than the end means investments have 12 months longer to grow in value, as well as earn dividends, and can be worth more as a result. In short – invest now and you will give your hard earnt money the greatest opportunity to make you money over the whole year in a tax-free environment.
Monthly contributions also reduce exposure to market volatility, by drip feeding money into the market, investors benefit from pound-cost averaging. Markets swing regularly and investments can fall as well as rise. By investing regularly, you can actually take advantage of this drop due to the ability to buy more units for the same investment.
For example, if you had invested £10,000 over a ten year period with an initial lump sum of £1,000 starting 5 years before the 2008 financial crash and remained invested up until the end of the 2012/13 tax year your returns from a drip fed investment would be over £1600 better off:
|Lump sum||Drip fed|
Even in the volatile times since the financial crisis, the power of drip feeding and pound cost averaging prevails. Analysis of returns from the FTSE 100 over a 10-year period ending in the tax year 2017/18 further highlights the benefit of drip feeding. If investors had annually drip fed £10,000 over 10 years with an initial lump of £1,000, it would accrue over £1,300 more, clearly proving the benefits of regular saving.
If you have money to save in your ISA allowance, there is no point in hanging around. Instead, take advantage of the new tax year’s allowance straight away and leave your investments to accumulate. Remember that time is money when it comes to investing; after all, as the saying goes “the early bird catches the worm” and in this case, there is a whole year of potential returns to be had. Simply setting up a direct debit to invest regular amounts deposits the money for you and will allow you to sit back and let your investments do the hard work. However, don’t make any hasty decisions – remember to take your time and identify your investment goals and time horizons.
*The Share Centre ISA account transactions 22 February 2018 - 5 April 2018.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.