Why being an ‘early bird’ ISA saver could leave you thousands better off
That’s the conclusion of new analysis from AJ Bell which compared the typical returns from ‘early bird’ savers, who put £3,000 into their stocks and shares ISA, with those who wait until the end of the tax year to use their allowance.
And it found that those who use their allowance early enjoy more substantial returns.
Getting in early
AJ Bell’s study was based on a saver putting £3,000 into a FTSE All Share tracker. The early bird strategy meant that the saver did so on the first day of the tax year, while the ‘late bird’ was based on doing so on the last day of the tax year.
It looked back to April 1999 when ISAs were first introduced, and found that in 14 out of the last 22 years early bird investors would have enjoyed a better return, by an average of £224.
That average hides some extraordinary years though. In 2003/4, the early bird investor would have ended up £2,506 better off, while in 2009/10 it would have meant an additional £2,892.
By contrast, late birds were found to do well when the markets were falling, so enjoyed a positive spell between 2000 and 2003 and again between 2007 and 2009.
Laith Khalaf, financial analyst at AJ Bell, said that as an ongoing strategy early bird investing comes up trumps no matter what year you start investing in, with the exception of 2019/20.
He continued: “If historical market performance is anything to go by, we can expect an early bird strategy starting in 2019/20 to gradually catch up and overtake the late bird strategy. That’s simply because almost all of the time, early bird ISA investors have more money in the market than late birds, and while there may be setbacks, in the long run that’s a winning strategy.”
Keeping it regular
Of course, many of us don’t have a £3,000 lump sum to invest each year, and instead the best we can do is to drip feed money into our account over the year.
The AJ Bell study found that this ‘halfway house’ tends to produce results somewhere in between the early and late bird strategies, though it noted that in six of the last seven years it had fallen behind both.
Khalaf added: “Regular monthly investments also make for a smoother journey than lump sum investing and take the faff out of saving, because they’re deducted directly from your bank account. You can even set up a regular saving ISA for 2021/22 at the same time as making your contribution for this tax year. It’s a simple, low maintenance, and disciplined way of investing, and totally relieves investors of the last-minute ISA rush.”
Getting the most from ISA season
This period of the year, as we approach the end of the tax year, has traditionally been referred to as ISA season. That’s because in years gone by there was something of a bun fight between savings providers, battling for our savings pots.
That doesn’t really happen anymore, though it’s notable that Marcus has finally launched its long-awaited cash ISA, while Nationwide has introduced a cash incentive for switchers.