Unlike chocolate eggs and the Easter Bunny, the benefits of saving or investing within an ISA can – and should – be enjoyed all year round. There is so much ‘use it or lose it’ advice from providers anxious that we maximize our annual ISA allowances as the tax year-end looms, that ISA ‘warnings’ have become as much of a feature of the run-up to Easter as pancakes and hot cross buns.
Anyone aware of the magical power of compound interest might be puzzled by the wisdom of depositing most, if not all, of an annual ISA allowance so late in the day. Why not 12 months earlier? Or, if the full amount is not readily available to invest on April 6th, why not make regular contributions to your cash or equity ISA throughout the year? Here’s why it could make an important difference to potential returns:
If the full ISA allowance of £10,680 (2011/2012) is invested on the first day of the new tax year in an account attracting 4% interest, investors would find themselves £427.20 better off after 12 months, simply by virtue of investing sooner rather than later. Even if the full allowance were contributed over 12 consecutive months (assuming the same 4% interest rate) a healthy £230.01 interest would be earned.
Just one problem – a quick glance at today’s ‘best buy’ ISA tables reveals that an interest rate of 4% is not currently available for cash ISAs (although some providers come close if you tie up your money for at least a couple of years). This may explain why so many more of us are looking for more attractive returns from stocks and shares – because the interest offered on our savings remains pitifully low – which is where an equity ISA comes in.
For those seeking enhanced returns via stocks and shares, the well-worn mantra bears repeating – the value of your investment can go down as well as up. This is not the same as having to take an unacceptable amount of risk – some assets are very much more conservative than others and your financial adviser can help you to ensure that you are invested appropriately according to your appetite for risk (or lack of it).
Just don’t wait for the daffodils.