A New Tax Year’s resolution for ISA investors

By: Tim Bennett
Why not beat the end of tax year ISA rush in 2018/19 by starting earlier? Tim Bennett weighs up the benefits.

A New Tax Year’s resolution for ISA investors

As another tax year drew to a close on 5th April, many investors will have sighed with relief that they boosted their tax-effective savings by topping up an Individual Savings Account (ISA) just in the nick of time by joining the scramble to invest that takes place every spring. So this year, why not change tack? Rather than leaving everything until the last minute, we think more investors should resolve to act sooner and get cracking at the start of the tax year instead.

March madness

We all lead busy lives, so it isn’t surprising that topping up ISAs (and other accounts, such as personal pensions) is left until right at the end of the tax year. Besides, who wants to have to think about boring financial matters over the summer? This is a pity, because there is an alternative – by planning ahead and getting organised earlier in the tax year, you could prevent several headaches;
We’ll take each point briefly in turn.

Pound cost averaging

One of the challenges of leaving investing until the end of the tax year is that you have little choice but to shovel all of the cash into an account in one go. Whilst it doesn’t have to be invested straight away – it can be held as cash within an ISA wrapper and then subsequently invested – you are still left with a decision about how and when it will be put to work. An alternative is to drip feed money into the stock market on a regular monthly basis and remove this concern altogether.
This comes with a caveat – during a bull market like the one we have seen since the last financial crisis, this drip feeding approach can leave you slightly worse off as the next two slides show;
However, in more volatile conditions, “pound cost averaging” can reap big rewards by ensuring you buy some of your investments more cheaply than you would otherwise, when prices dip. The following table shows that someone who puts a lump sum of £1,000 to work just as prices are about to fall does substantially less well than someone who buys on a regular piecemeal basis (4 x £250) during a downturn. Here, they end up with 100 fewer units.

The power of compounding

There is another potential benefit to putting your money to work earlier too – a greater compounding effect. Whilst no-one can forecast with any accuracy what the stock market will do during each tax year, investing early in the year helps if prices subsequently rise. Even if they don’t you will reap the benefit of a bit more dividend income on certain stocks and this can be reinvested. Fidelity have calculated, for example, that someone who put their full ISA allowance into UK stocks every year over the last decade would have been around £10,0000 better off at the end, had they done so at the start of each tax year, rather than waiting until the last minute.

Hassle and stress reduction

There are further benefits to starting early for those investors who like a relatively quiet life. Once a standing order is set up on a monthly basis for example, you can largely “lock up and leave” your investment and just tweak it as and when ISA limits change (currently the full ISA allowance is £20,000 per year). It also means you will not be hunting around for cash in a rush during March and nor will you suffer the processing headaches that can arise at overstretched providers tasked with putting new money to work and organising transfers from existing accounts.

Finishing up

If you would like to discuss any of these points in more detail, or find out how to go about getting your ISA account (and/or any others) started earlier this tax year, please contact an Investment Manager.