Isa savers lose £3,900 by investing monthly

Investors who deposit annual lump sums have seen better returns than those who pay in regularly. By Jessica Beard

Most savers invest money into their Isas as and when they have it, but those who make regular monthly payments could find themselves thousands of pounds worse off than those who pay in the same amount as a lump sum.

Sooner tends to be better when it comes to investing. The earlier you invest, the longer money has to grow, as markets tend to rise more than they fall. Those who can afford to invest their money in one go benefit more. For example, someone who planned to save £9,331 a year, the average annual Isa investment, would be better off by investing that money as a lump sum on the first day of the tax year, April 6, rather than investing it in equal instalments of £778 every month.

Over the past 10 years a saver who invested in the FTSE All-Share index of British stocks would have been £3,857 better off by investing £ 9,331 in one go every year rather than drip-feeding the money into the account on a monthly basis. As seen in the chart, the total payments of £93,310 would have grown to £126,953 for the yearly investor and £ 123,096 for the more frequent, monthly investor.

The clock is ticking this weekend and investors have just days to make full use of their Isa allowance before the counter resets on April 6 with the turn of a new tax year.

Many savers will be rushing to invest their full annual £20,000 allowance in the next few days. But those who leave it until the end of the financial year are likely to find themselves worse off than those who contribute at the start of the year.

Someone who chose the early-bird route and invested the full £20,000 on April 6 would have made £12,578 more after 10 years than savers who chose to invest the same sum at the end of the tax year, assuming an annual return of 5pc. That is according to calculations from Interactive Investor, the fund shop, which said early-bird investors were almost twice as likely to be “Isa millionaires”.

Laith Khalaf of AJ Bell, another fund shop, said the early bird investor had come up trumps in every tax year except 2019-20.

Becky O’Connor of Interactive Investor said that while it was best to put money to work for those who had it, timing could be tricky. She said: “Investing a lump sum at a point where stock markets are relatively high then watching as values fall can be dispiriting. The performance of a lump sum invested in one go will be governed by timing, which is difficult to get right.”

However, this timing effect should balance out over time. Those who are concerned about the prospect of future falls could drip-feed that lump sum in at points where they think markets are in a dip if they feel confident enough.

Another solution would be to make sure the lump sum is invested across a range of sectors, regions and types of investment, such as funds, trusts and individual stocks. This means that if one part of the market falls, the losses could be offset by gains elsewhere.

One benefit of regular investment is that it can be a good way to benefit from so-called “pound-cost averaging”, which means when the market dips you are able to buy more fund units or shares with the same amount of money. When the value rises again, you benefit more from that rise, Ms O’Connor said.

Investors can get the best of both worlds by doing a bit of both: investing a lump sum when they think it is a good time to do so and then setting up regular investments thereafter.

Vadim Nanu, from Bristol, has been investing into his Isa with AJ Bell for more than a decade and is able to use up his entire allowance well before the end of each tax year.

Mr Nanu, 40, said: “I’m a great believer in regular savings and it has become a hobby to manage my investments. Markets go up and down all the time and there is no way to predict that, so you need to keep investing bit by bit.”

He said he preferred regular investing to avoid the risk of markets tumbling after he had invested a large sum. He said he paid into his Isa regularly on a weekly or monthly basis.

Mr Nanu said his investments had grown by 20pc in 2020 thanks to strong performance from several stocks, including Tesla, the American electric car company, and Go-Ahead, the British public transport group.