Yahoo Finance The benefits of being an ISA early bird
Early birds are set to flock to ISAs in the first two weeks of the tax year, protecting their nest eggs from the taxman as he lays waste to key tax allowances again overnight.
As a general rule, the earlier you use your ISA allowance in the tax year, the more opportunity you have to save tax, and this year getting in as soon as possible is particularly valuable.
The benefits
By investing early, you get an extra year of protection from tax. If you hold investments outside an ISA, the fact that the dividend tax allowance has been halved, to £500, means investors run the risk of paying tax on their dividends far earlier in the year. By switching them into an ISA using share exchange (otherwise known as Bed and ISA), they’re protected from this tax immediately.
Likewise, the slashing of the capital gains tax allowance to £3,000 means investors planning to realise gains early in the tax year risk busting their allowances. Switching into an ISA on day one gives you the freedom to sell what you want when it makes the most sense for your finances, without thinking about tax.
Read more: How to build financial resilience when you're renting
For those who are building a portfolio, starting early gives you the opportunity to set up regular monthly payments into a stocks and shares ISA each month, and automatically spread your investments across the tax year. By drip feeding your money into stock market ISAs, you will take advantage of market falls, through what’s known as pound cost averaging. If you invest a fixed sum every month you will be able to buy more units when a fund’s value falls, providing the potential for greater profits when they have risen in value. One in 20 regular savers into an ISA get started at the very beginning of the tax year.
We tend to be wedded to being last minute dashers or early birds. Only one in 100 people with Hargreaves Lansdown stocks and shares ISAs invest at the end of one tax year and the start of the next. But if you’ve always been a dasher, this is your chance to get ahead of the game, and make the most of your ISA for the whole of the approaching tax year.
Who are the early birds?
Around one in 20 of our stocks and shares ISA clients get started within the first two weeks of the tax year, and men are likely to be quickest off the mark. Some 62% of Hargreaves Lansdown ISA clients are men, but 68% of early birds are. This may come down to the fact men tend to be on higher incomes, so they may have more investments outside an ISA that they want to move into a tax-efficient environment as quickly as possible. Given that more of them are higher and additional rate taxpayers, they also have an incentive to protect their investments from higher rates of dividend tax and capital gains tax.
Read more: The cost of having children later in life
The age group that’s most likely to get started early is the squeezed middle — aged 30-54. This is particularly impressive given that so many of them are in the midst of the time of life when they have an awful lot of demands on their time and money. It owes something to the fact that this is when we’re likely to have peak income, so more to put aside in savings and investments.
This age group is followed by those aged 65-80. This is striking given that this is often a time when investors are falling back on existing investments and spending rather than saving. Some will be continuing to build investments, while others will be maximising the tax efficiency of what they already have.
The history of ISA
The ISA celebrates its 25th birthday on 5 April, and like all of us, it has changed significantly over the past two and a half decades.
Back in 1999 you could pay in £7,000 a year — compared to £20,000 today, and there was no such thing as a Junior ISA for kids or a Lifetime ISA for property or retirement — they only came along in 2011 and 2017.
There’s plenty of nostalgia for 1999, the year SpongeBob SquarePants hit the screens and Britney Spears topped the charts. Those who were able to get stuck into ISAs during the early days could have plenty to look back on with satisfaction.
If you paid £1,000 into a cash ISA on day one, and it paid a typical rate of interest throughout, it could be worth around £1,900 today. It’s the kind of growth anyone would be pleased with, but it’s a drop in the ocean compared to the returns you could have seen from investing. If you’d invested £1,000 on day one in a global tracker fund, it could be worth over £4,000 today.
Of course, performance would have depended on what you invested in, and some investments have done astonishingly well. The best-performing share over the 25-year period is Diploma. £1,000 invested in the company on the first day of ISAs would be worth more than £276,000 today. Of course, single company investments involve risk, and the growth in the past tells us nothing at all about the future prospects of the company.
Read more: How to protect your finances if you're going through a divorce
The best-performing fund over that period was Marlborough Special Situations. £1,000 invested in the fund on the first day of ISAs would be worth almost £26,000 today. It’s focused on smaller companies, and can be volatile at times of market stress. It’s also worth bearing in mind that this doesn’t tell us how it will perform in future.
What an ISA looks like now
And while it’s frustrating if you missed out on these gains, the fact that ISAs are still with us 25 years later means we can still take advantage. The range has expanded now too, so there’s not just a bigger allowance, but there’s a better range on offer too.
Nowadays you have the choice of a cash or stocks and shares ISA as well as the more specialist innovative finance ISAs (IFISAs). Children under the age of 18 also have a Junior ISA allowance of £9,000 a year, and anyone aged 18-39 can open a Lifetime ISA to save towards a first property or for retirement. You have an allowance of £4,000 a year and the government will top it up by 25%, so you could get up to £1,000 more.
There will be those who are nostalgic for the good old days of 1999, but as anyone who was inspired to buy a PVC trench coat after watching The Matrix back in the day will tell you, some things get better over time. In this respect, ISAs have a lot in common with the breathability of fashionable outerwear.
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
Watch: How to save money on a low income
Download the Yahoo Finance app, available for Apple and Android.
