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Why it pays to be an early bird

Why it pays to be an early bird

Category: ISAs

Updated: 15/04/2015
First Published: 15/04/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The new tax year is well underway, but have you thought about making your ISA subscription yet? If you haven't, it could be time to consider it – after all, the early bird catches the worm!

Reap the benefits of compounding

According to analysis from Fidelity Personal Investing, early bird investors – those who make their investment as soon as possible in the new tax year – are over £10,000 better off than those who leave it until the last minute. The move could be particularly beneficial for those who invest in stocks & shares ISAs: the returns on offer have the potential to be far higher, so the long-term benefits could be better, too.

Their calculations focus on three hypothetical ISA investors who have invested their full ISA allowance each year over the past decade into the FTSE All Share Index. They'd all have invested a total of £101,080 by now, but they'd have a markedly different final pot, depending on when in the tax year they invested.

  • Investor A is the 'lump sum early bird' who deposits the full ISA allowance at the beginning of the tax year. By now, thanks to compound interest and fund performance, they'd have amassed £154,055.13.
  • Investor B is the monthly saver who still starts investing at the beginning of the tax year, but splits their ISA payments and makes monthly deposits. By now, they'd have an ISA pot of £150,176.58.
  • Investor C is the lump sum but last minute investor, who leaves it until the last day of the tax year to make his investment. By comparison, they'd have a pot of £143,850.66.

As you can see, the difference is substantial! The investor who makes his deposit as soon as possible is over £10,000 better off than the last-minute saver. But, even those who aren't able to make a full lump sum investment at the start of the tax year needn't lose heart, as the investor who makes regular monthly contributions is still markedly better off.

"It is clear that the early bird ISA investor catches the best returns," said Maike Currie of Fidelity Personal Investing. "When it comes to investing, it's time in the market that counts - the saver with the most money invested for the longest time tends to do the best in the long run. Every extra day you allow time to work on your ISA portfolio is a day that you won't get back if you let it pass with your money sitting in a low-interest bank account.

"Investing at the start of the tax year gives your money an additional 12 months of tax-efficient growth. You also benefit from the impact of compounding – that 'snowball' effect of building new investment returns on the returns you've already achieved."

Don't forget about cash!

So, if you could be as much as £10,000 better off in the next few years, doesn't it make sense to start early? It really could pay to be an early bird, and the same applies whether you want the safety of cash ISAs or are comfortable with the riskier option of stocks & shares.

For example, putting the full £15,240 allowance in the top-paying fixed rate ISA (currently State Bank of India's five-year account paying 2.50%) would earn you interest of £381in its first year. If you waited until the end of the tax year, you'd miss out on almost a year's worth of interest – £381, remember – and wouldn't be able to benefit from the future compounding of that interest, either.

Over the years that could seriously add up, so the message is clear – don't delay! Even if you can't invest a lump sum now, opting for an easy access ISA that allows monthly additions could be a great alternative, as could stocks & shares ISAs (which generally allow you to make further investments on a regular basis) if you don't mind taking some extra risk. Whichever option you choose, start thinking about how you'll make that first investment, and you could reap the rewards.

What next?

Compare the best cash ISA rates

Check out stocks & shares ISAs

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.