REAP HIGHER RETURNS BY DRIP FEEDING YOUR ISAS
How experts reap richer rewards by investing early in the tax year – and often
INVESTING into an Individual Savings Account can reap rich rewards, especially if you take a long-term outlook. It also pays to be an early bird rather than wait until the end of the tax year.
Between now and next April, adults can invest a maximum £20,000 into an Isa. The returns will accumulate free of all tax – capital gains and income.
Children have a ‘junior’ Isa allowance of £4,260 – although the plan must be set up by a parent.
Those aged 16 and 17 can complement this with money in an adult cash – not investment – Isa. This means they could put away £24,260 between now and April 5 next year tax-free.
Many people do not think about using their annual Isa allowance until near the end of the tax year when they realise that unless they take action, they will lose it. But research indicates that if you had the financial armoury to invest early in the tax year since Isas were introduced in 1999, you could have been handsomely rewarded.
Financial adviser Hargreaves Lansdown has shown that someone who invested their full Isa allowance at the start of each tax year since 2008 would be £20,000 better off than someone who had waited until the last day of the tax year.
Analyst FundExpert has calculated that if someone invested their full Isa allowance on April 6 every year from 1999 to 2017, their total contribution of £186,360 would have grown to £305,405 if the money had been invested in a fund tracking the FTSE 100 Index.
If it had been put in a well-managed UK investment fund, such as Marlborough Special Situations, its value would now be £964,509 – a tax-free profit of £778,149. Selling a portfolio of this size outside an Isa would result in a capital gains tax bill of more than £190,000, assuming a tax charge of 20 per cent. Brian Dennehy, managing director of FundExpert, says: ‘ If you are able to make contributions every year, the returns can accumulate handsomely.’
Of course, not everyone can fund an Isa in such a way. A half-way house is to invest monthly from the start of the tax year. Below four experts tell of their monthly-based strategy.