Those who top up their stocks and shares ISA at the start of the year could earn thousands more than those who decide to wait. Even those with cash ISAs could benefit from putting money away early.
Data from AJ Bell shows that an investor who put £3,000 into an ISA in the average global equity fund on the first day of the tax year since 1999 would now have a pot worth £200,373.
Meanwhile, an investor who put away £3,000 on the last day of each tax year would have £191,102 – over £9,000 less.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The new tax year brought with it a series of changes to tax and allowance that will make maximising your ISA allowance more important than ever.
We explain why the start of the tax year makes for a better time to make use of your ISA allowance.
Why you should invest in your ISA at the start of the tax year
“By starting your ISA investments at the beginning of the tax year, small deposits of funds into the market can be achieved,” says Ed Monk, associate director of personal investing at Fidelity International.
“Over the medium to long term, this may help to smooth the ups and downs of stock market returns and help you ride out any volatility. When you pay money into a stocks and shares ISA, you can hold your money as cash and choose to invest when you’re ready - this can be useful if you’re uncertain of market conditions and don’t want to invest immediately but want to stick to your monthly contributions without feeling rushed into making an investment decision right now.”
Indeed, as Laith Khalaf, head of investment analysis at AJ Bell, points out, early ISA investors in 1999 benefited from the 29% rise in the value of a typical global equity fund between April 1999 and April 2000. However, they would have also suffered losses during the resulting crash after the dot-com bubble burst.
The same trend played out in the financial crisis. Those who put away money on 6 April 2008 suffered losses of 23% by 5 April 2009.
But the early ISA investor still came out on top, with a final ISA value of £94,443 compared to £88,044 for the last-minute investor, even if the latter secured shares at a lower price towards the end of the tax year.
This is because the longer your money is invested, the more time it has to recover as well as compound.
What if you make smaller ISA contributions?
Data from Nutmeg shows similar findings. Someone who contributed £6,000 to a medium-risk stocks and shares ISA on the first day of the tax year since April 1999 would have £8,387 more than if they’d waited until the end of the tax year.
And you can still benefit from compounding returns if you invest small amounts regularly.
In fact, Nutmeg’s calculations show contributing monthly has historically led to better returns long-term than leaving investing a lump sum at the last minute.
Those who invested £500 monthly into their ISA since 1999 would have £1,280 more in returns than those who made a lump sum payment at the end of the tax year.
“You can open an ISA any time during the tax year, which runs from 6 April to 5 April every year,” adds Monk. “If you invest at the start of the tax year, you can benefit from a whole year’s compounding interest or investment returns – so there are potential rewards to be had from starting early.”
-
Investing in a dangerous world: key takeaways from the MoneyWeek SummitIf you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
-
Autumn in Crete, the Greek island of cultureMoneyWeek Travel Katie Monk reviews the InterContinental Crete, Grecotel LUXME White Palace and the adults-only Asterion Suites & Spa
-
Act now to bag NatWest-owned Ulster Bank's 5.2% easy access savings accountUlster Bank is offering savers the chance to earn 5.2% on their cash savings, but you need to act fast as easy access rates are falling. We have all the details
-
Moneybox raises market-leading cash ISA to 5%Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
-
October NS&I Premium Bonds winners - check now to see what you wonNS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
-
Bank of Baroda closes doors to UK retail bankingAfter almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
-
How to earn cashback on spendingFrom credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend
-
John Lewis mulls buy now, pay later schemeThe CEO of John Lewis has said the retailer will consider introducing buy now, pay later initiatives for lower-priced items.
-
State pension triple lock at risk as cost balloonsThe cost of the state pension triple lock could be far higher than expected due to record wage growth. Will the government keep the policy in place in 2024?
-
Paragon raises rate on one-year fixed cash ISA to 5.75%Paragon Bank ups its one-year fixed cash ISA rate to 5.75% - is it enough to top the table?
