How it pays to act early

The start of a new tax year comes with a shiny new ISA allowance, currently sitting at a generous £20,000.

However, while the temptation may be to sit back and relax, secure in the knowledge that you have a year to make the most of it, there are real advantages to getting started early in the tax year.

Every year, investors burn the midnight oil, making sure they use up the last of their ISA allowance in the hours and minutes before the 11.59pm deadline on 5 April. This makes sense: ISA allowances operate on a ‘use it or lose it’ basis. If you don’t use it in one tax year, you can’t get it back, so it’s better to use it up at the last minute than not use it at all.

However, this year, it may be worth resolving to start planning a little earlier because it could boost your ISA pot in the longer-term. The first thing to consider is that many investments generate an income; interest in the case of bonds, or dividends for stocks and shares portfolios. As it stands, companies in the FTSE 100 pay an average dividend of just over 4 per cent per year*.

If you don’t invest until the end of the tax year, you miss out on this income for the whole year. This could be as much as £800 on the full £20,000 investment. That £800 then compounds over time, so the real loss to your portfolio over time is even higher.

Between 2007 and 2017, those who had invested their full ISA allowance in the FTSE All Share at the start of the tax year ended up around £6,620 better off than those who had invested at the end

Then there’s the potential for capital growth. Stock markets don’t go up every year, but over time, they have risen in more years than they have fallen (8 down years versus 12 up years for the FTSE 100 over the past 20 years⁽²⁾.

In general, therefore, early bird investors win and this is reflected in their returns over time. According to research from investment group Architas, over the ten years between 2007 and 2017, those who had invested their full ISA allowance in the FTSE All Share at the start of the tax year ended up around £6,620 better off than those who had invested at the end. Excluding charges, investing at the start of the tax year would have seen investors with a total of £165,160 compared to £158,540 for those waiting until the end of the tax year⁽³⁾.

That said, few of us have great big lump sums to invest at the start of each tax year. Saving regularly may not achieve quite such a dramatic effect, but it still gives you many of the advantages of investing early. It is also good practice to avoid the highs and lows of stock market investment. Investing regularly means that you avoid the risk of putting money into the stock market when it is at its peak, only for it to drop horribly over the next six months. While stock markets have tended to recover over the longer-term, this type of volatility can be uncomfortable and most would rather avoid it.

Perhaps one of the most important things about investing early is that it gives you time for reflection. Investment is a long-term game; 5 April could be the best time to invest, but it’s unlikely. The chances are that you’re scrabbling around, trying to find the best option at that particular moment, which may not be compatible with your long-term goals. Investing early means you don’t end up trying to time or second guess markets. You can invest in line with your financial plans. In this way, it makes good sense to be an early bird this spring.

1 Financial Times (link)
2 TopForeignStocks.com (link) and IG (link)
3 YourMoney.com (link)