A new tax year has begun and with it the chance to begin thinking about making maximum use of your 2023/24 tax-free investment allowances. You may be thinking: Why hurry when there’s virtually another 12 months still to go before the tax year ends?
But the counterargument is, why delay when your chances of investment success are statistically improved the more time your money spends invested? Or as we like to put it: it’s time in the market not market timing that counts.
In fact, our calculations show that you could potentially make an extra £55,000 or more in an individual savings account (ISA) over 25 years by investing at the start of a tax year rather than waiting until the end of one to do so.
The exact amount you could gain depends on your personal circumstances. Not everyone can invest the annual ISA maximum of £20,000 just like that.
But to give you an idea of the difference those extra 12 months can make to your long-term wealth, let’s imagine an investor invested £20,000 now and an additional £20,000 at the start of every subsequent tax year, earning a hypothetical annual investment return on that money of 5.5% after costs.
In that scenario, we calculate they would end up with more than £1,079,000 in their ISA by the end of the 25th year – broadly £500,000 of invested capital and another £579,000 in growth.
In contrast, if they waited until the end of every subsequent tax year to invest they would end up with just £523,000 in capital growth.
Early and often
Encouraging people to invest early and often is in keeping with our mission to help investors achieve the best chance of long-term investment success, and all the more so if it means taking advantage of legislation that is designed to save them tax.
Whilst investing carries risks, our four investment principles are there to guide you through the ups and downs of markets and help reduce the potential for losses."So if you have a lump sum of money that represents more than your rainy-day emergency cash, why not put it to work in the market sooner rather than later via your ISA?
Alternatively, if you can wait until you’re 55 (rising to 57 in 2028) to access the money, why not invest sooner in a self-invested personal pension (SIPP)? This way you may be able to get a tax top-up from the government too – and all the more so now, potentially, given the lifting of the lifetime allowance and rise in the annual pension allowance top £60,000.
It’s never too soon to invest. But it can sometimes be too late, depending on your goals. Because the less time you give it, the less potential there is for compounding to work its magic on your behalf.
What’s compounding?
Compounding is a mathematical phenomenon that helps your investments to grow more quickly by paying a return not just on the money you invest but also on all the money you previously invested and on the money that, in turn, you made on those earlier investments.
It’s akin to a sort of snowballing effect and it’s why, in the example earlier, our hypothetical investor ended up with an extra £55,000-plus in their ISA.
So now that a new tax year has started, why waste a year by leaving it until the last day on 5 April, 2024 to invest in your ISA when those extra 12 months could make a big difference to your wealth in the long run?
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The eligibility to invest in an ISA depends on individual circumstances and all tax rules may change in future.
Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
Any tax reliefs referred to in this article are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
Important information
This article is designed for use by, and is directed only at, persons resident in the UK.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.
The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2023 Vanguard Asset Management Limited. All rights reserved.