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…the early bird catches the worm.
What a time the Easter period is! Over-indulging on chocolate eggs whilst also making the most of the double bank holiday to relax and make efficient use of the holiday allowance. All this fun is then swiftly followed by a hectic time of throwing ourselves back into the struggles of our day jobs and concocting deceitful mental tricks to get ourselves back into shape before the Summer arrives. It appears that we indulge and relax just to go back to stressing and starving ourselves. This may be a slightly extreme view but it underlines some of the irrational aspects of the human psyche. Of course there are those disciplined souls amongst us that are more consistent and can withstand temptation, but most of us, for better or for worse, live for our indulgences.
It is often the same when it comes to investing. As we demonstrate over Easter, we are slightly irrational and we hurry to use an allowance before we lose it (another psychological predisposition – our fear of loss is typically greater than our desire for gain) rather than take a controlled and optimised decision. We leave it to the last minute, stress as to whether we are getting the best deals, rush through application forms and wait on tenterhooks as websites slowly load and then potentially crash.
However, economists and financial advisers agree that it pays to invest in your ISA as early as possible. If you have the money available, it’s best to invest your full ISA allowance – or as much as you can afford to – as early in the tax year as you can. That way you can immediately start to benefit from compounding returns, plus you may be able to move your funds between ISA providers if a better deal becomes available through the year. The investment returns, and therefore the tax benefits, can mount up as your investments grows over the tax year.
This is especially true when it comes to the Innovative Finance ISA (IFISA) that invests in loans which generate income on a regular basis rather than grow in value like shares. For example, if you had contributed around £7,000 (close to the average amount invested into ISAs last year) to an IFISA on the first day of the tax year rather than waiting until April 5th, you could have accrued almost £400 in additional returns (based upon the returns of an industry benchmark). With the ISA allowance set at £20,000 for an individual, or £40,000 for a couple, there is now more scope than ever to maximise tax-efficient investing through the ISA.
The top reasons why you should invest into your ISA early
– The sooner you use your ISA allowance the higher the tax benefit. You shelter your investments from income tax and you can benefit from tax-free returns for longer.
– Get peace of mind and avoid the end of tax year panic.
– Compound interest has been described as the eighth wonder of the world – basically you earn returns on your returns. The sooner you invest the longer you have to benefit from compound interest which can have a huge impact on your future wealth over the years.
– Make life simple – after signing the initial ISA declaration, you don’t have to fill in a tax return for your investments. The sooner you do it, the less paperwork you have.
Those of us investing through a financial adviser have a helping hand to nudge us to invest early in the tax year to maximise these benefits – Goji certainly sees this through our own financial adviser community.
Investors can choose to allocate the full amount to an Innovative Finance ISA, which can typically help investors looking for low volatility investment option, but with rates that are typically higher than cash, or spread across Cash and Stocks and Shares ISAs, Help to Buy as well as the new Lifetime ISA for those who are eligible.
Whichever ISA you choose, and whether or not you choose to invest it through Goji, the sooner investors start investing or saving, the longer they can make the most of the ISA’s tax allowance and the more help they can get from the tax man to support their investment objectives.