How investing your ISA allowance early can boost your savings

Just like going to the dentist or finishing housework, many of us see investing our ISA allowance as a chore to be put off until the last minute each tax year.

But Fidelity Worldwide Investment research shows that being proactive with your investments can lead to significantly improved returns over time.
 
Investing earlier in the tax year means that your savings have a longer chance to benefit from the impact of compounding. Here, Fidelity shows the potential benefits of investing in May (only one month into the tax year) versus investing on the last available days at the beginning of April. This table shows the outcomes of two potential savers, who have both used their full ISA allowances each tax year since 2000 to invest in the FTSE All Share index, which represents a wide cross-section of UK-listed stocks.
 
Saver A, the latecomer, has invested the allowance at the last minute in April each year. Saver B, the early bird, has put money aside in May, one month into the tax year. They have invested exactly the same amount – but over the same period, there is a significant difference between their savings.

The annual allowance for ISAs changes according to government rules. For this tax year, 2013-14, the limit is £11,520).

Amount invested into FTSE All Share | Month of the tax year | End amount

Saver A (The latecomer) | £121,080 | April | £200,759

Saver B (The earlybird) | £121,080 | May | £204,246

Source: Fidelity, January 2014
 
Tom Stevenson, Investment Director at Fidelity Worldwide Investment, says the £3,487 difference between the outcomes for Savers A and B is significant. “These hypothetical savers invested exactly the same amount of money over 14 years, both using their full ISA allowance each year. While they both made better returns than they would have if they had kept their money in cash, the earlybird is more than £3,000 better off, and that’s no small sum. Many of us put off investing our tax allowances, but – unlike some of the other chores we ignore for as long as possible – getting in early can make a real difference when it comes to our ISAs. Investing into an ISA is not the arduous process it was years ago: you can fill in your details quickly and easily online, and there’s plenty of help to guide you in making your investment choices. The perks of being an earlybird are clear, so savers should act quickly to take advantage of the power of compounding in their portfolios.”