Reasons to invest in an ISA at the start of the tax year
The new ISA tax year is approaching, and the benefits of investing early are impossible to ignore. Read on for your guide to making the most of your ISA allowance for 2018, and how to invest as early as possible.
There’s a reason why March, and not April, is known as ‘ISA season’ among financial professionals. Despite the best of intentions, there is always a rush to use up the full ISA allowance just before the end of the tax year.
According to new research from investment house Willis Owen, £1 in every £8 deposited in its stocks and shares ISAs is invested during the last week of the tax year. This suggests that a significant number of investors are leaving their ISA allocations to the last minute. But by waiting until the end of the tax year to organise your ISA investments, you could be missing out on a huge range of benefits.
The ISA allowance for 2018/19 is a massive £20,000, and the new tax year begins on the 6 April 2018, so time is running out if you want to maximize your tax-free investments. However, if you make a plan to invest at the start of the tax year, you could unlock a range of great benefits that can save you time, stress and money.
Benefits of opening an ISA at the start of a tax year
- Access more investment options
Saving at the start of the tax year gives you more options. For instance, when you know you are going to be locking away your money for at least 12 months, you can afford to consider the rates offered by long-term bonds and fixed-rate funds. These investment structures reward longer-term investors by offering favourable, fixed returns over a set period, just as long as you commit to keeping your money in that same place for the duration of the term.
- Organisation of your finances
The beginning of the tax year is the perfect time to set new budgets and work out how much money you can afford to save on a monthly basis. All UK taxpayers are entitled to save £20,000 within an ISA every year, which equates to approximately £1666 per month. Ensure that you are using your full allowance by setting up a direct debit into your ISA account every single month, then watch your nest egg grow.
- Reduce risk through ‘averaging’
Until recently, ‘averaging’ was a financial skill used by professionals only, but now retail investors are starting to realise the benefits.
Simply put, if you buy the same stock at different times and at different prices, you can offset any volatility by ‘averaging’ out your buy price over time. For instance, if you had bought Facebook stock on 1 February 2018 when it was at an all-time high, you would have spent $193.09 per unit. By 1 March 2018, as the Cambridge Analytica data scandal began to take shape, Facebook stock had dropped to $175.94 – an 8.9% decrease. However, if you had set up a regular purchase order to buy Facebook stock on the first day of every month, you would have paid an average of $184.52 per stock. This financial tool is only available to people who invest early and regularly, so the sooner you set up your ISA investments, the more risk protection you receive.
Read more about pound cost averaging.
- Minimise your financial stress
Once you have allocated your ISA money you can leave it where it is for a whole year, thus reducing the pressure to make continuous financial decisions. This is not an inconsiderable benefit. Financial stress affects most people at one time or another – whether you are struggling to keep up with credit card payments, or worried about an underperforming investment. But if you can make all your ISA investment decisions at the beginning of the tax year, you can free yourself from unnecessary administration or decision-making later in the year, while your money simply gets to work.
- Capitalise on compounding
This is particularly beneficial for anyone investing in a stocks and shares ISA where dividends or interest payments are made monthly or quarterly. By reinvesting these returns, you can benefit from the effect of compounding on your investments – essentially earning interest on your interest. The earlier you can allocate your 2018 ISA allowance, the more money you stand to make.
- Match the market
Between 6 April 2016 and 6 April 2017, the FTSE All-Share index rose by approximately 17%. By comparison, the average rate on a Cash ISA in 2017 was just 0.93%. If you had invested £20,000 in a FTSE tracker fund on 6 April 2016 and left it there for the entirety of the tax year, this would have equated to £3400 growth by 6 April 2017.
However, if you are investing your whole ISA allowance in the stock market, it is vital that you maintain a diversified portfolio and prepare yourself for the potential of short-term volatility.