Why it’s savvy to be an early bird ISA investor

The Nutmeg team


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Are you one of the many who rush to invest in an ISA before the 5th April deadline? Or are you more of an early bird investor, taking advantage of the start of a new tax year? The latter approach could help you maximise any returns you make, particularly with the £20,000 ISA allowance for the 2022/23 tax year. 

Taking time out of our busy lives to think about our annual ISA allowance can prove difficult, so it’s understandable that many people may wait until towards the end of the tax year to invest, sometimes leaving it right up until just minutes before midnight on the 5th (luckily our client services team worked another late shift this year and were on hand to help). 

However, if you have the money available, and assuming you make a return on your investments, our analysis shows that over time you could be better off investing your full ISA allowance – or as much as you can afford to – as early in the tax year as possible. 

You can immediately start to benefit from compounding, and the tax-free investment returns can mount up year-on-year. Of course, as with all investing, there is a risk the value of your portfolio could go down as well as up. 

Invest early and reap the rewards 

Since the ISA was first introduced in April 1999, UK savers and investors have been able to help their money go a little further with an annual allowance that doesn’t require you to pay any tax on returns made.  

When the ISA was originally introduced in 1999, the allowance was much lower than it is today – the maximum ISA allowance was £7,000, but you could only save a maximum of £3,000 in a cash ISA. Our calculations show that if you’d contributed £6,000 to a medium-risk stocks and shares ISA on the first day of each tax year since 6th April 1999, you could have accrued £12,969 more than if you’d waited until 5th April the following year*. 

 

Getting into a good investing habit 

Of course, most of us don’t have £20,000 – the current annual ISA allowance – sitting around in a bank account waiting to be invested in an ISA. But the good news is that you can still benefit from compounding returns by investing small amounts regularly. 

Our calculations again show that contributing monthly is likely to generate better returns over the long term than leaving it to the last minute and making a lump-sum contribution. 

If you’d contributed £500 every month since 1999, you could have accrued £5,194 in additional returns, compared to making a lump sum payment at the end of the tax year. 

Making monthly contributions helps you get into a good habit, so you can look beyond daily fluctuations towards your long-term goals. 

This calculation assumes that you stay invested in all that period. There is still a risk you could lose money if you were to invest for only a limited time during that same period. 

 

Have you considered a LISA? 

If you’re eligible and putting money aside for your first home or your retirement, then a Lifetime ISA (LISA) might be right for you. UK residents aged between 18 and 39 can open one and deposit up to £4,000 per year until the day before their 50th birthday. For every pound you contribute, the government will add 25% – in other words, a maximum bonus of £1,000 every tax year until you’re 50. However, if you withdraw the money before you’re 60, and it’s not for the purchase of a first home valued up to £450,000, or a terminal illness, you’ll pay a 25% government penalty. This means you may get back less than you put in. 

If you invest in a stocks and shares LISA with Nutmeg, we’ll invest that extra 25% on your contributions as soon as they come in. Investing the bonus right away means your overall pot has more time in the markets and has a better chance of benefiting from compounding over time. 

Dreaming of owning your first home? A LISA could be the best way to invest and save for your deposit. With this in mind, we’ve put together a step-by-step guide to how it works 

 

How about investing for a child? 

If there are children in your family, how about getting in early on a stocks and shares Junior ISA (JISA) which has a £9,000 annual allowance?  

A JISA needs to be set up by a parent or guardian for children under the age of 18, but parents, guardians, friends or family can contribute to the account. The money contributed to a Junior ISA is gifted to the child, meaning only the child can access the money – and only after they turn 18.  

At Nutmeg, you can only open a Junior ISA for a child who is under 16, and it could make sense to be even more of an early bird and open the account as soon as the child is born. The full 18 years means they can benefit from compounding and afford to take more investment risk. With no tax paid on returns, the money you invest has the potential for further growth. Why not help set up your child’s future by diarising the 6th April to start investing straight away in a new tax year? 

 

Open a Junior ISA today

Be an early bird 

Remember, whichever type of ISA works for you, the sooner you start, the sooner you’ll be on the way to reaching your financial goals. 

Sources 

[*] Nutmeg calculations using data from Macrobond AB. Market indices used are FTSE All Share total return index and BofAML Gilts total return index. Calculations based on each contribution invested 60% in UK equities and 40% in UK government bonds. Returns are market index returns less fees of 1.05% per annum. Monthly calculations are based on an investment on the first day of the new tax year and at the start of the next month thereafter. Data from 5/4/1999 to 31/3/2022. 

Risk warning  

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.  

 

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