Advantages Of Saving Into An ISA Before Deadline Day
Every year, as reliably as the appearance of the first snowdrops and crocuses, March sees newspapers and magazines fill up with articles and advertising around ISAs. The reason is simple – the tax year ends and any portion of the annual ISA allowances of £20,000 not used is lost. Unlike SIPPs, ISA allowances cannot be rolled over and work on a ‘use it or lose it’ principle. And this year was no different as the ISA deadline passed last Friday.
Of course, those in the position to be able to use up their whole tax-sheltered £20,000 ISA allowance have the whole year to do so. And while many do make monthly instalments from their salary or pay in lump sums earlier as bonuses or good months come around, the extent of the end-of-tax-year drive suggests a significant percentage do not. They wait until the last minute and then use all or most of their ISA allowance in one go.
It can be imagined many might argue that their reason for doing so is to be sure they are financially able to use all of their ISA allowance, or as much of it as they do end up taking advantage of. But that makes less sense in the context of the fact there is nothing to stop funds paid into an ISA being withdrawn again if required. They can even be put back into the ISA at little cost at any point before the end of the tax year if possible.
And there are significant advantages to drip feeding an ISA allowance evenly throughout the year. Especially if all or part of the allowance is paid into a stocks and shares ISA rather than a cash ISA, where interest rates on offer are currently very low. So why shouldn’t you wait until the last minute to use you ISA allowance?
The sooner you invest the sooner you start earning returns
Over the longer term, a well-balanced investment portfolio has historically always outperformed cash. Compounded, if dividends are reinvested, you have a good chance of earning around 7% a year, as an annualised average, from an investment in a benchmark index like the FTSE 100. At least, that would have been the case over the past 20 years. A little more even. So the sooner you put your money to work, rather than sitting in the bank at an interest rate currently less than inflation, the better your long term returns.
Drip Feeding Investments Lowers Risk
If you invest all of you ISA allowance into funds or individual company shares in March you are at the mercy of market conditions over that particular month. Sometimes that will work out well and sometimes badly. Drip feeding in investments every month means you will, over time, take advantage of average returns and not those skewed up or down based only on March markets. This significantly lowers market timing risks and over years will almost certainly lead to better risk-adjusted returns for your ISA portfolio.
More Considered Investments
Making one big ISA investment at the end of the tax year will mean limited time to make your investment decisions on how you are going to allocate it. If you drip feed each month, you can spend more time taking initial decisions and then perhaps reconsider and adjust your investment strategy over the course of the year and taking changing market conditions into consideration.
Last but not least, paying into an ISA every month will condition you to better budgeting of your monthly income and make it much more likely you will use up your entire ISA allowance each year. There’s a much higher risk you’ll spend money you have sitting around before the end of the tax year. And setting up a monthly transfer will mean you quickly won’t even miss it as you get used to your budget minus the ISA contribution.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.