Many people leave their financial planning until the last minute, at the end of the tax year. Luckily, some providers remain open until midnight on 5th April each year and will accept money right up until this deadline. However, it is always quite a stressful time – will the money get there on time, will the new application reach the provider? Technology has helped but it’s still nerve-wracking. It is prudent to plan early not only to avoid the stress but also because there could be financial benefits to doing so.
This article will look at those benefits.
Invest early in the tax year
By investing into a pension or an ISA early in the tax year could give you an additional 12 months investment returns.
If we look at this in the context of the FTSE 100, the past 10 years the cumulative return has been 68%. This equates to 6.8% per annum if we take the average return. This would amount to growth over 12 months of £1,360 a year based upon a £20,000 investment into an ISA. Or £2,720 if you invested £40,000 into a pension. In reality, the return could be more or much less than this over one year.
Where I have clients who have money invested within a General Investment Account (often called OEICs), I may recommend that we move £20,000 out of the investment where there are no overt tax advantages into their ISA to usitlise the allowance and have an additional 12 months of tax free returns. ISAs are free from Capital Gains and Income Tax unlike GIAs and OEICs.
It is worth noting that there is no guarantee that investments will return positive returns and values could fall as well as rise.
If you cannot afford to make a one off payment at the beginning of the tax year or even if you can, it may be a good idea to make regular payments into an ISA or Pension.
By doing this, you not only miss the tax year end panic but you can also benefit from something called pound cost averaging. Pound cost averaging means that as the markets move up and down by investing on say a monthly basis can smooth out the impacts of sudden stock market movements because you buy shares at different prices. When the value is down, you buy more for your money and when the markets are high, the converse is true. Thus averaging out the price you pay to invest in the stock market over time.
This avoids investing a large sum before a possible market fall where the loss would be keenly felt. By investing smaller amounts at regular intervals market falls will have less impact and mean that the contributions can buy more shares for the same money.
It is worth noting that there are limits to the amount you can pay into a pension and ISA. The ISA allowance for 2019/20 is £20,000. For more details on the amount you can pay into pension, read my previous blog here or seek financial advice.
To plan your finances early, and avoid the last minute rush contact me for a no obligation complimentary initial meeting.
Tax rules, rates and allowances are all subject to change and are dependent on individual circumstances. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested