It’s April, the sun is finally shining down from blue skies, and so… it’s time to get shopping for a big winter overcoat, right?
What’s that? You were thinking more flip-flops and Bermuda shorts?
It’s true, even in meteorologically temperamental Britain the idea of buying winter-proof clothes at the start of spring is pretty absurd.
Hence this question: is the annual ISA rush at the end of every March and into the early days of April any less crazy?
Hurry, hurry, everything must go
You can’t have escaped noticing:
- The newspaper articles (“Only 10 days left to fill your ISA!”)
- The adverts all over the press and Web (“Here’s the best way to fill your ISA!”)
- The retargeted advertising that follows you around the Internet because you once clicked on an advert touting Fund XYZ as the greatest place for your ISA pounds (“Hey, why haven’t you filled your ISA with us here at XYZ yet? We were getting on so famously!”)
It’s exhausting. And yet candidly we at The Motley Fool also take part in this frenzy. It would be silly not to.
You see, data going back years shows this is indeed when many people fill their ISAs. The so-called ISA season is so important to financial firms like Hargreaves Lansdown (LSE: HL) that the period is called out in their full-year results, the same way a high-street retailer might talk about a good Christmas.
Yet I believe those who were rushing to deploy this year’s ISA allowance of £15,240 per person by the 5 April deadline are almost as silly as people buying duffle coats in May or sunscreen in September.
By 5 April – the end of the tax year – they’ve been more exposed than they needed to be for 12 months to one of the most potentially corrosive reducers of investing returns.
What’s more, depending on how they had their money investment beforehand, they could also have missed out on 12 months of superior returns, too.
Three reasons not to wait
I’d argue there are at least three good reasons to rush to fill your ISA not by the last minute of 5 April – but rather as soon as you can starting 6 April.
Firstly, if you have money outside of a tax shelter that could be inside one, you may be throwing money away. It costs no more to own shares in an ISA than outside these days, and once your money is tucked in an ISA it’s safe from capital gains and dividend taxes.
True, we all get a capital gains allowance and the new annual dividend allowance (although the latter is already set to be cut, so who knows how long it will be around for). But you may have sales of other assets – shares, property, or your antique car collection – that could also require you to call upon your capital gains allowance.
Similarly, your dividend allowance might be eaten up by a large unsheltered portfolio of shares, or by a dividend income you get as a director if you’re one of the millions who works through a Limited Company.
Second reason – have you ever heard this adage?
“It is time in the market that counts, not timing the market.”
While shares have delivered the best returns over the long-term compared to cash or bonds, returns are always lumpy. Sometimes equity markets go up and every investor thinks he or she is the next Warren Buffett. Other times you’d have more fun setting fire to £50 notes than watching your portfolio shrink day after day.
The solution is to stay invested for as long as you can – with your eyes on the farthest horizon that matches your goals – and to ride out the ups and downs.
Waiting a year in cash before you put your next tranche of money to work in shares is the opposite of that approach. If you’re going to get your money invested in equities, get on with it!
Which brings me to the third good reason to start investing into a new ISA on or around April 6th.
Many people reading this either won’t have a full ISA allowance sitting around ready to deploy at the start of the tax year.
Or, even if they do, they may be nervous about investing such a large lump sum all at once (until spurred on by ISA season mania, perhaps…)
Understandable. However, nobody says you have to invest all your money at once. It’s completely possible to save regularly into an ISA every month via a Direct Debit, the way most of us put money into a pension (only ISA money comes out of your taxed earnings, of course).
This ‘little and often’ approach gets your money protected from tax as soon as possible. It also means you’re feeding your money into the market over time – a gentler process for many than making big lump sum payments, especially new investors.
Opt out of ISA Season
Note, too, that the annual ISA Allowance will soar to a whopping £20,000 for 2017/2018. For couples that means a potential £40,000 can be put into an ISA next year – and then left to compound safe from the taxman for hopefully many more years to come.
Do you really want to wait until this time next year before finding a spare hour to frantically decide with your partner where to invest as much as £40,000?
Thought not.
If you haven’t used all your ISA allowance for 2016/2017 you should do so, without delay. But then start thinking about how you’ll invest next year’s, too!
With a bit of luck you could be fully invested – or have set up a monthly Direct Debit – by 7 April.
And then you can take the rest of the year off from thinking about ISAs…
