In the tax year 2017/2018 alone, a massive £69 billion was invested in ISAs in the UK by 10.8 million adults. In which month did you invest into your ISA? Was there a specific reason behind your decision?
An ISA is a convenient, accessible and tax-efficient way to save and invest. Alongside your pension, it should be a necessary addition to your investment portfolio. Investing long-term in an ISA can lead to a significant tax-free income when you reach your retirement.
Every year there is a last-minute rush to put money into an ISA before the end of the tax year arrives and you can no longer top it up. Understandably, there is always something else we are too busy with to stop and think seriously about our finances. Yet ultimately this could be costing you money, whereas, did your urgent 'to do' list reward you financially? Let’s look at three reasons why it benefits you to invest in your ISA in advance.
1. You could make more money
Imagine you have cash ready to invest into your new ISA; if you invest on the 6th April, your money will be earning a return for a much longer period than if you invested on the 5th April on the following tax year. Just looking at this one year in isolation, your capital would have been in the ISA for a whole 365 days longer.
ISAs are essentially free from income and capital gains tax which is a fantastic opportunity to make a clean, tax-free income; so if you invest as soon as possible, you will benefit from protection against income tax on dividends and interest.
If you and your partner invested £20,000 each on the 6th April for 10 years with a 7% annual return, you would have £78,686. Investing this same sum; however, on the 5th April, the following year, means you will have only invested your capital for nine years; thus producing £73,538. This means it would have cost £5,148 of your potential earnings in investment income simply for waiting a year. Investment returns can be negative as well as positive, and this is crucial to bear in mind.
2. It’s off your to-do list
Additionally, if you delay investing in your ISA until the last minute, you run the added risk of forgetting to do it altogether. It is important to remember that with ISAs, you have to utilise your annual allowance or you lose it. In the haste of a last-minute investment, you may decide to hold on to cash, and you could be trying to buy time before making an investment decision.
Cash is critical for emergencies and so having contingency cash available for unplanned spending is wise, but it is not optimal for long term investing. If you invested £20,000 in a Cash ISA, over the last 10 years, you would have £15,526 in real terms, i.e. today’s money after inflation.
The after-inflation real return on a £20,000 equity investment, over 10 years has been £35,146. (Source: Barclays Equity Gilt Study 2019). You may not invest in 100% equities as per the Barclays study, because you should be investing in a profile in line with your risk appetite. Please note past performance is not indicative of future performance; you could, in fact, achieve less than you originally invested.
A stocks and shares ISA should give a real return above inflation. Cash, however, is much less likely to provide a return above inflation over the long term. In the example above, investing in a last-minute cash ISA for 10 years leads to a negative result of £19,620.
3. You build the habit
ISAs launched on the 6th April 1999; before this point, there were TESSAs (Tax Exempt Special Savings Account) and PEPs (Personal Equity Plan). It is estimated that there are approximately 1,000 ISA millionaires in the UK (people who have £1 million or more within an ISA).
Achieving this figure, however, takes a solid investment strategy and you have to make full use of your ISA allowance every year. Having £1 million in an ISA means you could enjoy a tax-free income.
You may even have other pension or income sources, and if this income makes use of your other tax allowances, it is actually possible to retire as a non-taxpayer.
ISAs can be inherited by a spouse or civil partner, and so ISAs are beneficial as you can pass on these tax-efficient savings when you die. They form part of the estate on second death.
There are several reasons to replenish your ISA as soon as you can, on or after the 6th April each year. If you have effectively executed your financial planning with your chartered financial planner, you will know by the 6th April whether it is affordable. Affordability should be the only reason you may consider delaying investing into your ISA.
For the next tax year make sure you put this tick on your April 'to-do’ list!
If you would like any ISA advice, please contact one of our chartered financial planners today.