Early bird: It can pay to sort out your Isa at the start of the tax year
Investing into an Individual Savings Account can reap rich rewards, especially if you take a long-term outlook.
It also pays to be an early bird rather than wait until the end of the tax year.
Between now and next April, adults can invest a maximum £20,000 into an Isa.
The returns will accumulate free of all tax – capital gains and income.
Children have a ‘junior’ Isa allowance of £4,260 – although the plan must be set up by a parent.
Those aged 16 and 17 can complement this with money in an adult cash – not investment – Isa. This means they could put away £24,260 between now and April 5 next year tax-free.
Many people do not think about using their annual Isa allowance until near the end of the tax year when they realise that unless they take action, they will lose it.
But research indicates that if you had the financial armoury to invest early in the tax year since Isas were introduced in 1999, you could have been handsomely rewarded.
Financial adviser Hargreaves Lansdown has shown that someone who invested their full Isa allowance at the start of each tax year since 2008 would be £20,000 better off than someone who had waited until the last day of the tax year.
Analyst FundExpert has calculated that if someone invested their full Isa allowance on April 6 every year from 1999 to 2017, their total contribution of £186,360 would have grown to £305,405 if the money had been invested in a fund tracking the FTSE 100 Index.
If it had been put in a well-managed UK investment fund, such as Marlborough Special Situations, its value would now be £964,509 – a tax-free profit of £778,149.
Selling a portfolio of this size outside an Isa would result in a capital gains tax bill of more than £190,000, assuming a tax charge of 20 per cent.
Brian Dennehy, managing director of FundExpert, says: ‘If you are able to make contributions every year, the returns can accumulate handsomely.’
Of course, not everyone can fund an Isa in such a way. A half-way house is to invest monthly from the start of the tax year.
Below four experts tell of their monthly-based strategy:
Angela Murfitt, chartered financial planner at Fairstone Group: Stock market volatility appears to be returning so I will be phasing contributions into my Isa over the next six months – in funds HSBC Global Strategy Dynamic, Threadneedle European Smaller Companies, Veritas Asian and Lindsell Train Global Equity.
The first has broad global diversification – perfect for a core portfolio holding.
I believe that Europe and global equities offer more scope than the UK in the current climate and the Asian story remains positive. Hence, my three other fund choices.
Juliet Schooling Latter, research director at FundCalibre: I have already invested half my Isa allowance. Part is in Ashburton India Equity Opportunities.
Due to Indian premier Narendra Modi’s reforms, its firms are taking better care of shareholders.
UK smaller companies are more attractively valued than large-caps. I invest in Liontrust UK Smaller Companies.
I will drip feed £500 a month into Guinness Global Equity Income. It has an equally-weighted portfolio of 35 high-quality stocks.
I will use the other £4,000 if there is a market dip. Many equities still look costly relative to their history.
Alison Treharne, chartered financial planner, Shore Financial Planning: With the annual tax-free dividend allowance down from £5,000 to £2,000, the tax shelter of Isas is more important.
My Isa money is going into Shore’s ‘adventurous portfolio’ via regular monthly savings. Short-term volatility does not worry me.
Two ‘stand-out’ funds I love within the portfolio are First State Asia Focus and Schroder Asian Alpha Plus.
I believe the long-term growth story of Asia through these funds will serve me well.
I am 48 and have at least a 10-year investment horizon.
Brian Dennehy, managing director at FundExpert: For monthly investing I like funds with a bit more risk – either already beaten up but overdone or relatively cheap yet with long-term potential.
I like Liontrust UK Smaller Companies as 30 per cent of the fund is committed to dynamic UK tech firms.
The next big thing is more likely to be found here than in a global tech fund full of mega-caps.
Jupiter India has had a poor year but the attractions of India are arguably clearer now post economic reforms.
Japanese smaller firms remain cheap. Baillie Gifford Japanese Smaller Companies has strong momentum.