Making use of your full ISA allowance each year is a great goal to aim for. But what is the best time of the tax year to invest? Should you try and fill up your pot as soon as you’re able to or hang back a little and wait?
New research from Willis Owen may give us an answer. Read on for some insights into this investing dilemma.
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What is the ISA allowance for 2021?
Following the recent announcement of the Budget, there were no changes made to the current ISA structure.
This means that you still have an allowance of £20,000 each tax year. There have also been some hints that this annual figure might be frozen for five years.
You can split your full allowance across the different types of ISA accounts. But with rock-bottom interest rates, it’s the stocks and shares ISA that currently offers the most promise and flexibility.
What happens when my ISA is full?
Once you hit your ISA limit, you won’t be able to deposit any more money. So no more benefits from the tax advantages.
This is only until the end of the tax year. When the next tax year starts, your yearly allowance starts afresh at zero again.
Keep in mind that these allowances can change and aren’t guaranteed to be the same each year.
When is the best time to invest my full ISA allowance?
Interestingly, this research shows that investors who use their total allowance at the beginning of the new tax year outperform those who wait or invest throughout the year.
This makes sense when you consider how often it’s preached that time in the market is what’s important.
By investing your money at the beginning of the tax year, you’ll spend more time in the market than someone who invests later.
How much more do early investors make?
The difference in results is actually quite stark.
Over the last 21 years, by investing the full ISA allowance into a global fund at the beginning of each tax year, you would have seen your portfolio grow to a whopping £430,480. This is £16,327 more than if you’d waited until the end of each tax year.
Interestingly, those who invested regularly came out worst. They were left with pots of under £330,000 for the same time period.
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Are there any benefits to investing later in the year?
Although there are often long-term trends with investing, not every year is the same.
If you had invested your full ISA allowance in March 2020, you probably would have had a better performance than if you invested everything in April 2019. This is because the market crashed, and shares were cheap. But a quick recovery meant massive gains for some.
Keeping some of your allowance back to buy shares during dips throughout the year can sometimes work out. However, hindsight is 20/20. As Adrian Lowcock, head of personal investing at Willis Owen explains: “It is time in the market that matters the most, not timing it.
“Given that stock markets generally rise over the longer term, there is a significant advantage to investing at the start of the tax year rather than waiting until the end. With the increase of the ISA allowance over the past few years, we would expect this gap to continue to widen over time.
“The benefits of using an ISA early on are more than just financial. By investing at the beginning of the tax year, people can avoid spending the money on something else. They can also avoid the stress of doing it last minute. So when the end of the tax year comes, they can relax whilst others are panicking.”
Where can I invest my full ISA allowance?
In order to make sure you are making the most of your investment opportunities, it’s important to try and use the best account you can.
To help you out, we’ve done lots of research to compile some of the top stocks and shares ISA accounts available.
Don’t fret if you cannot use your whole allowance each year. Just do your best and keep focused on your long-term financial goals.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
