Buying UK shares in a Stocks and Shares ISA can be a great way to build wealth. It allows someone to invest £20,000 in any tax year without having to pay a penny to the taxman.
Such tax advantages can have a significant impact on an investor’s long-term wealth. It also means there is a clamour among many ISA investors to max out their allowance before the year ends in early April.
Yet research from AJ Bell suggest ISA users are getting their investment strategy back to front. It shows that those who invest at the start of the tax year can make much higher returns.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
£9,271!
AJ Bell considered how much someone who invested £3,000 each year in a global equity fund would have made since 1999. And it concludes that “it’s the early bird ISA investor who comes out on top”.
Some investors unflinchingly invest their ISA allowance as soon as it’s available every year, on 6 April. Clearly this means your money is protected from tax from the outset, but it also means you stand to have a bigger ISA pot in the final analysis because your money is at work in the market for longer.
AJ Bell
The data shows that someone who invested that £3,000 on the first day of each tax year would have made £200,373 by today. By comparison, someone who invested that few thousand pounds on the final day of the year would have made £191,102.
That’s a difference of £9,271.
“Smelling of roses”
Okay, those investing in early 1999 rather than later that tax year would have benefited from the dotcom boom. The typical global equity fund increased 29% in value between 6 April 1999 and 5 April 2000, AJ Bell notes.
Yet the data shows that those investing earlier on can also make greater returns, even when financial crises occur.
AJ Bell notes, for example, that ISA investors who invested £3,000 in said fund on 6 April 2008 would have seen the value of their money fall 23% by the end of that tax year.
Still, the research shows that that early bird ISA investor “still comes up smelling of roses”. They would have made £94,443 today, higher than the £88,044 than someone who invested on 5 April 2009 might have generated.
Here’s what I’m doing now
Of course, the past is no guarantee of future performance. Yet history shows us that the longer being invested in the stock market, the better the chances of making superior returns.
Over the long term stock markets tend to rise. So even if there’s a bad first year, an investor’s portfolio can recover strongly over time. And, of course, the longer someone is invested in assets like UK shares, the more money they stand to make through the miracle of compounding.
This is why I plan to keep investing in my own ISA despite the uncertain macroeconomic landscape. Like those early bird investors, I think I have a great chance to significantly boost my returns by using my allowance today.
