The ISA early bird could get a bigger worm

Picture of an Early Bird referring to ISA

Savings

MoneyPlus Features Team

2nd May 2013 at 1:47pm

When it comes to making ISA payments, I’ve often wondered why so many people leave investing right up until the very last minute. Every year, far too many people find themselves in a flap, anxiously trying to make the most of the opportunity to invest tax efficiently before the 5 April deadline.

Why leave it to the eleventh hour?  Well, some people might be delaying because they don’t have enough capital to invest until that point. But remember that it may be possible to wrap an ISA around some of your existing nest eggs to shelter them from tax.  Cash deposits, unit trusts and share portfolios can all be moved into an ISA and count towards your annual limit.

Delaying is even harder to understand when you realise that the ISA early bird really does get the worm. And here’s why.

If you invest at the start of the tax year, you get a full 12 months potential growth. If you leave your payment until the final tax year deadline, the opportunity for a full year’s returns will have flown.

ISAs offer unparalleled tax efficiency without locking your money away. There is no income tax on any interest or dividends received and any investment growth is free from capital gains tax. So there is no reason to delay.

And you don’t have to pay it all in one go. Making a commitment to make regular monthly payments is one way to ensure you start filling up your allowance in good time.

This year’s ISA allowance has increased to £11,520 with up to £5,760 allowed into Cash ISAs.

This year’s ISA allowance has increased to £11,520 with up to £5,760 allowed into Cash ISAs.  In recent years, the amounts which can be saved tax efficiently into pensions have been reduced.  But ISA contribution limits continue to go up. If you had paid the maximum into your stocks and shares ISA since its introduction in 1999, that could equate to £180,455 nestled away, assuming an investment return of 6% and assuming dividends had been reinvested in that period.

Last tax year the FTSE rose by 11.7%. Investing at the start of the tax year would have seen the maximum ISA contribution benefit from tax free growth of £1,320 had it matched that performance. Also you will not have to pay any additional tax on the interest or dividends received on your payment. A 3% dividend payment would have added another £338 to your fund.

Past performance is not a reliable guide to future performance.

So it makes sense to let your money enjoy more than the final few days in tax freedom and avoid the frenzy as investors flock at the last minute to use their annual ISA exemption before it is lost.

If procrastination is the thief of time, then putting off making your ISA contributions until the end of the tax year is robbing your of an extra year’s tax free investment return.

Find out more about the options available to you with a Standard Life Stocks and Shares ISA.

Before making any financial decision we suggest seeking advice.

As with any investment the value of your investment can go up or down and may be worth less than what was paid in.

Remember that laws and tax rules may change in the future. The information here is based on our understanding in April 2013. Your personal circumstances also have an impact on tax treatment.

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