Beat the rush

David Prosser looks at the benefits of investing your ISA at the beginning of the tax year.

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Did you feel the pressure to use your 2021-22 individual savings account (ISA) allowance by the 5 April deadline? If so, maybe you should take a different approach in the 2022-23 tax year. On 6 April, every adult in the UK got a new £20,000 Isa allowance and there are good reasons to think about how to use it straight away, rather than waiting until the last moment next year.

There are a couple of ways to do that. If you have a lump sum available, you can simply invest as much as possible – up to the £20,000 limit – in your 2022-23 ISA, all in one go. Alternatively, you could choose a regular savings plan, investing from as little as £50 or £100 each month over the course of the next 12 months.

Lump sum or regular savings?

Assuming you have the choice, which approach is best? Well, if you think stock markets are going to rise over time – which you probably do, if you’re considering investing in the first place – the lump sum wins out. That is simply because you’ll have more money in the market earning a return at an earlier stage; over time, the benefits of compound interest amplify that advantage.

Numbers crunched by BestInvest recently underscore the point. The financial adviser looked at the returns you would have achieved by investing £20,000 each year in a fund replicating the performance of MSCI World Index, an index of world stock market performance. It considered how you would have got on by investing at the start of the tax year, the end of the tax year, or monthly.

Investors who went early did best, building up savings of £356,353 over ten years to April 2021. That was 3.3% more than the £344,633 investors would have earned by investing their money on a monthly basis.

That said, regular savings plans have advantages. For one thing, they make saving affordable – not all of us have big lump sums to invest each year. Also, they give discipline to your savings; you set up a direct debit to transfer the money to your ISA each month, and then that happens without you having to think about it. There’s a potential psychological benefit too, in that it can feel scary investing larger sums of money, particularly at times such as now when markets seem so uncertain; it may be more comfortable to invest a small sum each month.

Both approaches, in other words, have their appeal. And it’s worth pointing out that on BestInvest’s analysis, both approaches have, at least in the past, delivered a superior performance than waiting until the end of the tax year. That strategy would have built up a pot of savings worth £329,316 in the example above – 7.6% less than savers generated by investing at the start of the tax year.

Which ISA?

Deciding when to invest, of course, is only half the battle. You will also need to decide what to do with your money. Remember, ISAs are not investments in their own right; rather they are wrappers into which you can place a wide range of other assets; once inside, all the income and profits those assets generate is then entirely tax-free.

For long-term savers and investors considering the stock market – the asset class that has historically generated the best long-term returns – the key is to think in the round. What stock market investments do you already hold, and where would new investments fit in? If all your investments to date have been in the UK stock market, say, maybe now is the time to build in some international holdings in order to spread your risk.

Collective investment funds such as investment companies are a good way to achieve this diversification. Run by professional managers, they pool your money with that of other savers, which means the fund can be spread across multiple holdings. And you can invest in a variety of funds to get exposure to multiple markets.

The good news is that online platforms and brokers make it very easy to identify, research and invest in such funds, whether you’re taking the lump sum or regular savings approach. There is no excuse for leaving your ISA until the last minute next time around.