ISA ‘early birds’ nearly twice as likely to be a stocks and shares ISA millionaire | Personal Finance | Finance
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On April 6, 2021, the 2021/22 tax year will begin, with ISA and pension annual allowances resetting. With the end of the current tax year now in sight, now may be the time some people are looking at their finances, and considering whether they are maximising their saving potential – as well as preparing for the year ahead.
There’s no specific time people will set aside savings and make investments, if the latter is something which one wants to do.
However, it seems paying attention to time could pay.
According to research by interactive investor (ii), the “ISA early bird” is almost twice as likely to be an ISA millionaire.
Figures show 37 percent of total subscriptions among ii ISA millionaires for the current tax year (2020/21) came before April 6 and 30, 2020, compared to just under 20 percent for all other ISA investors.
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According to ii, when it comes to ISA investments, there is countless research illustrating that investing the ISA allowance at the start of the tax year, as opposed to leaving it to the last minute, can pay.
Calculations by interactive investor show, although there only appears to be one day in it, someone who chooses the “early bird” route and investing the full £20,000 ISA allowance at the start of each tax year (April 6), rather than the end (April 5), could end up with a portfolio worth £264,136 after 10 years.
This is assuming a five percent annual return.
This is £12,578 more than those investors who choose to invest the same £20,000 at the end of each tax year and effectively only have nine years’ worth of growth, where their portfolio would have grown to £251,558, the firm added.
Of course, nothing is guaranteed, and ii pointed out these scenarios are for illustrative purposes only.
Furthermore, it’s very important to be aware that capital is at risk when investing.
Myron Jobson, Personal Finance Campaigner, interactive investor, commented: “Many of us are not fortunate enough to be able max out the annual ISA allowance at the start of the year – especially at a time where many have experienced a significant loss of income as a result of the coronavirus crisis.
“But if you have cash to invest, your money will be in the market longer when it’s put to work at the start of the tax year, and in turn will benefit from a whole year of compounding returns.
“Put another way, more of your money is sheltered from the tax man.
“Of course, the all-in-one approach runs the risk of unfortunate timing if stock markets experience heavy falls – especially amid the prevailing COVID-19 stocked market volatility, but history shows that markets have a knack of recovering from heavy losses overtime for long term, patient investors.”
However, Mr Jobson pointed out there’s another aspect of time which is key.
“While overall it is good to be early, time in the market matters most,” he said.
“Nervous investors can drip feed investments monthly to help smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging.”
The annual ISA allowance in the current tax year is £20,000.
This covers all four types of ISA – cash ISAs, stocks and shares ISAs, innovative finance ISAs, and Lifetime ISAs.
The latter also has its own limit – a person can put in up to £4,000 each year until they’re 50.
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