For those who want to grow their wealth efficiently over the long-term, a stocks and shares ISA is a great place to start. ISAs always get a lot of attention at the end of the tax year, but the savvy investor knows it’s the early bird that catches the worm.
Investors can now put £20,000 into a cash ISA or stocks and shares ISA each tax year, or split their annual allowance between the two. If your investment increases in value, the profit is protected from the taxman.
This is the main draw of the ISA. It’s a simple and tax-efficient way to grow your wealth over time.
But as the ISA season winds down, investors fall victim to ‘out of sight, out of mind’, which could be diminishing the potential for returns. Many will wait until the last minute to decide how to make the most of their annual tax wrapper, but investors could increase their scope for returns with just a little bit of forward planning.
Here are five reasons why you should get ahead of the game and start maximising your ISA allowance today.
1. Maximise tax efficiencies
The main benefit of an ISA is that your investments can grow tax free. You won’t pay capital gains tax if your investments increase in value, and your income is also safe from the taxman – whether from dividends or bonds.
If you start investing earlier in the year, you stand to benefit from the tax-free returns for longer. However, as the annual CGT allowance is £11,300 for 2017/18, this won’t necessarily affect all investors.
2. Maximise returns
The case for long-term investing is well established, and while a year is usually considered short-term, it’s a lot longer than just one month. This will give your investments more chance to grow, although the value of your portfolio can go up or down.
A diversified investment strategy looks to smooth out sector-specific risks by offsetting any negative performance with the positive. The earlier you start, the more opportunity your investments have to grow tax-free.
3. Get peace of mind
You either use the annual ISA allowance, or you lose it. Taking advantage of your tax-free wrapper earlier on in the year means you don’t have to worry about missing the deadline next April.
4. Cut down on paperwork
Make your life simple. After signing your initial ISA declaration, you don’t have to fill in a tax return for your investments within your stocks and shares ISA.
5. Grow your investment over the full year
Investing £20,000 as a lump sum isn’t possible for everyone. But if you plan ahead and contribute to your ISA on a monthly basis, you could end the tax year with a strong investment portfolio that’s grown throughout the year.
By drip-feeding cash into your portfolio, you can also benefit from pound cost averaging. As timing the market is one of the hardest challenges facing investors, making regular deposits can take the emotion out of investing and provide the chance of smoother returns amid market volatility.