Catching the worm

The dust has settled after the burst of activity that always comes with the end of the financial year – especially for financial planners and accountants. For us, part of that activity involved last-minute ISA investments: some people, it seems, always need a looming deadline to spur them into action.

But we like to remind our clients that investment is one thing that should not be left to the 11th hour. It’s nearly always a case of the earlier, the better.

For those investing in cash ISAs, it’s obvious that by investing on the first day of the year, you’ll have earned an extra year’s tax-free interest compared with your last-minute neighbour.

With stocks and shares ISAs, the principle is the same. Although, of course, investment risk adds a complication: it’s possible to invest at the start of the year only to see stock markets fall, so you would have been better off waiting. However, for any single investment, it’s not a practical response in general. Whenever you invest, the value will rise and fall over time, and by delaying, you’re just guaranteeing that long-term growth has one less year to work.

Over the long term, the difference is more than you might think:

• If, on the first day of each tax year, you invested the maximum into one of the most popular ISA funds, Neil Woodford’s Invesco Perpetual High Income fund, then over the last ten years you would have accrued a fund of £137,403 – compared with £119,545 for the last-minute investor. This is a tax-free profit of £17,858, equivalent to an extra year-and-a-half’s ISA contribution after just ten years.
• Going back to the (perhaps embarrassing) predicament of making a loss in the first year, you could look back over 11 years, including a dramatic 30 per cent first-year fall in 2002/03. However, even then, the figures still show the clear advantage of investing sooner rather than later. The early bird would have built up £155,101 – a full 8 per cent more than the last-minute investor. The difference is still equivalent to an extra year’s ISA contribution.

There are other related advantages. By annually moving monies from, say, unit trusts to tax-sheltered ISAs, not only is the potential capital gains tax reset to nil on the money, but the ISA tax exemptions means that it doesn’t build up again. Using both allowances in this way is very valuable, but even more so at the beginning of the year, when typically the switch can be made using less of the capital gains tax allowance. (It’s often a good idea to keep a little of the allowance unused to cover unanticipated capital gains, from company takeovers of direct shareholdings, for example.)

So, making your ISA contribution at the start of the tax year means that the potential advantages do add up:

• It benefits from an extra year’s potential growth or interest.
• It is sheltered from income tax and capital gains tax one year earlier.
• It avoids any risk of you missing the deadline because of your ‘cheque being lost in the post’ or trivial application foul-ups.

There is one final advantage: being organised means no last-minute rushing around, which is helpful both for client and their grateful adviser.

Scott Gallacher is a director at Rowley Turton

(The figures in this article are taken from FE Analytics (12 April 2013) and are based on the investor making the full ISA allowance for the ten tax years 2003/04 to 2012/13, and 11 tax years 2002/03 to 2012/13, invested into the Invesco Perpetual High Income Accumulation fund. Past performance is not a guide to future performance.)