ISAs: why the early bird gets the best returns

Updated
Hand putting stopwatch into silver piggy bank
Hand putting stopwatch into silver piggy bank



If you think there's no rush to use this year's individual savings account allowance (ISA), bear in mind that it's usually the early bird who catches the worm.

This tax year, which began on April 6, you can invest up to £15,240 into tax-free ISAs, either in stocks and shares or cash, or in both.

The earlier you invest in the tax year, the longer your money your money has to grow tax-free.

Jason Hollands, of financial advisers Tilney Bestinvest said; "Not only does investing earlier in the tax year remove some of the pressure to make a hasty decision; it also means your hard earned cash is put to work for longer. After all, as the saying goes 'the early bird catches the worm' and in the case of an ISA there is a whole year of potential returns to be had."

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According to research by online investment management service Nutmeg, if you'd invested £10,000 in a medium-risk portfolio for each of the past 10 years right at the start of the tax year rather than at the end, you'd be sitting on an extra £8,000 worth of returns.

Putting £10,000 into an ISA on April 6 each year over the past 10 years would mean you'd currently have a savings pot worth £141,812, compared to £133,751 if you'd invested on the last day of the tax year.

Compare ISAs

Benefits of regular saving

Many people delay using their ISA allowance early on in the tax year because they don't have a big lump sum to put away.

However, if you're investing in stocks and shares, regularly drip-feeding money into your ISA can be a good way to protect yourself from stock market volatility.

That's because your regular monthly payments will buy more units or shares when prices are low and fewer when they are high, so you don't have to worry about picking exactly the right time to invest.

Maike Currie, spokesman for Fidelity Personal Investing said; "Many investors may struggle to stump up a lump sum at the start of the tax year to put into their ISA. But don't let this put you off. A monthly savings plan is an easy way, making smaller contributions into your ISA savings pot, and can create healthy savings habits too."

Nick Hungerford, chief executive at Nutmeg, agreed that making smaller regular payments is better than delaying paying into an ISA. He said: "If you don't have the lump sum ready to invest now, your next best option is to drip feed smaller amounts of money each month into a stocks and shares ISA, so that each contributed sum experiences the effects of compound returns sooner.

"An amount invested in April has 11 months longer invested with more time to take advantage of the ebbs and flows of the stock market. Another key benefit is bringing discipline to your savings – ignore daily market fluctuations and stick to your plan to reach your long-term goals."

Compare ISAs

Top cash ISAs

If you don't have an appetite for risk and prefer to stick to cash ISAs, then the good news is that the start of the new tax year has seen the launch of several competitive deals and rate increases.

For example, The West Brom has just announced that it is raising the rate on its WeBSaveR Limited Access ISA from 1.4 % to 1.55%.

Kevin Mountford, head of banking at comparison site MoneySuperMarket said: "We are beginning to see ISA rates increasing, and new products entering the market as we start the new tax year. It really could be a case of the early bird catches the worm and it might pay for savers to take advantage of the rates on offer now.

"The increase in rate from The West Brom coupled with Nationwide Building Society launching a regular saver ISA offering a 2.0% rate which allows up to £1,270 per month to enter the account, are positive pieces of news for savers."

According to savings website Savingschampion.co.uk, other competitive cash ISAs include Hinckley and Rugby Building Society's 120 Day Notice Cash Isa Issue 2, which pays 1.60% on a minimum investment of £500.

If you're happy to tie up your cash for a while, Virgin Money's one-year fixed rate Isa paying 1.65% is the market leader, while the top five-year fixed rate cash Isa is also from Virgin Money, paying 2.35%. Both these accounts can be opened with a minimum investment of £1.



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