Early Bird or April Fool? When To Invest
Should you use your ISA allowance and maximise your pension contributions at the start the tax year or leave it until the end?
We normally advise clients to make Individual Savings Account (ISA) and pension contributions at the start of the tax year, however this is not always possible or practical for them.
Consequently, as we approach the end of the tax year, we at Rowley Turton have been more than a little manic helping clients make their last minute ISA and pension contributions in order to avoid missing out!
To some extent this last minute panic is unavoidable, especially with pension contributions as many people won't actually know what their earnings will be until nearer the end of the tax year. This is an issue for both the affordability of any contributions and the tax relief that those contributions might benefit from.
However with ISAs, at least your contribution limits are known at the start of the tax year. Consequently, subject to having the monies available at the start of the tax year, people would normally be better to make their ISA contributions at the start of the tax year rather than leaving them to the last minute.
This way they'd benefit from a whole year of extra tax free investment growth and dividends. Last minute contributions also carry the additional risk of an unfortunate postal delay meaning you accidentally miss out on your utilising your ISA allowance for that tax year. Better to be the early bird rather than a potential April fool.
With regards to the extra year's investment growth gained for making an ISA contribution at the start of the tax year as opposed to the end, does it really make much difference? And what happens if the market's crashes just after you've made that contribution. Surely you'd be kicking yourself for being a little rash and not waiting until later the tax year?
We understand the concerns of investment losses but no one can consistently and accurately predict which way the markets are going in the short or even medium term. Investment is primarily the triumph of optimism over pessimism, on the basis of the hope for long term growth. Consequently if investment is on the basis of the expectation for long term growth, with the acceptance of potential of short or medium term losses, then, on average, investing today should be better than investing tomorrow.
To put some numbers on this, we've looked at one of the most popular ISA funds, the Invesco Perpetual High Income Acc fund, and whether or not you'd have been better investing in this at the start of each tax year or at the end.
ISAs replaced PEPs in the 1999/00 tax year with an initial allowance of £7,000 (currently £15,240) allowing total Investment ISA contributions of £166,560.
Assuming you'd made the maximum ISA contributions each year, from the start of the 1999/00 tax year until the start of the 2016/17 tax year, then the Invesco Perpetual High Income Acc would have returned you £403,658. This compares to just £372,683 had you made those same ISA contributions at the end of the tax year on the 1st April, i.e. April's Fools Day.
It's worth pointing out that being an early bird wouldn't have always worked in your favour with you having been better waiting until the end of 5 of those 18 tax years. The worst case was the 2002/03 tax year, when being the early bird would have cost you over £10,000 today. That said, investing at the start of the following tax year, 2003/04, rather than the end, would have recovered this loss, having made you over £10,000 today.
Overall, the difference in being an early bird catching the worm, as opposed to an April fool, would have made you £30,974, i.e. more than twice the ISA allowance for the last tax year.
To help you decide when and where to invest, request a free consultation with a well-rated independent financial adviser near you here.
Source for Performance Figures: FE Analytics, Bid-Bid basis
The use of the Invesco Perpetual High Income Acc fund in this blog is by way of an example only and is not a recommendation of this particular fund.
The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations), and investors might not get back the full amount invested. Past performance is not a guide to future performance. Equity based investments do not afford the same capital security that is afforded with a deposit account.