Adding to your pensions and ISAs early in the new tax year

With the start of the new tax year, now is a great time to consider how best to make the most of your opportunities to benefit from adding to your pension and ISA investments.

The fact is, when and how often you pay in new money can make a big difference to your wealth over the long term.

Starting to add to your investments early in each tax year can be extremely useful because of how annual tax allowances work, and how the ‘compounding effect’ can favour you. Let’s take a look at this in more detail.

Making the most of your tax allowances sooner

Of course, both pensions and ISAs have yearly contribution limits. Normally, you can add up to £60,000 to your pension(s), depending on your earnings and HMRC’s tapering rules. You’re currently also entitled to put up to £20,000 of new money into ISAs each year. But if you contribute early on in the tax year:

• Your money is sheltered from tax for longer.
• You avoid the risk of running out of time later in the year and missing out on some of your allowances.
• You minimise the temptation to spend cash that you could have invested for a better outcome in future.

If you wait to contribute until March next year – so just before we reach tax year-end – you’ll have the same allowances available, but you’ll potentially gain less from using your entitlements.

Benefitting from more time in the market

The compounding effect of investing money earlier could be the biggest advantage for you. This is because there’s simply more time for your investments to grow. Dividends and interest can also be reinvested promptly, and previous gains will be compounded.

Investing every month for example can potentially bring you more gains over decades, compared to making less frequent contributions. However, it’s important to remember that anything you invest can rise as well as fall, and there’s also the possibility that you may get back less than you put in.

Coping better with market volatility

Over the last few years, markets have been volatile, with share prices experiencing quite a few ups and downs. By investing a set amount regularly, say monthly and/or yearly, too, rather than via an occasional lump sum, you benefit earlier from ‘pound-cost averaging’. In essence:

• The effects of market fluctuations are smoothed out by your money buying more shares when prices are low, and fewer shares when prices are high.
• This potentially leads to a lower average cost per share over time.
• As a result, you could achieve more gains when it comes to cashing in a shares-based investment.

Putting pension tax relief to work immediately

Your pension contributions attract income tax relief as applies to you (20%, 40% or 45%) along with employer contributions if you’re in a workplace scheme. So, by contributing early, your tax relief is invested sooner, and that tax boost starts compounding right away.

In particular, if you’re a higher-rate taxpayer, you’ll enjoy a sizeable tax advantage.

Remaining flexible should your circumstances change

Financial planning stays more attuned with your actual needs when you can easily adjust your regular payments-in across the tax year, matching changes in your financial goals or your tax situation.

For instance, if you’ve already used tax allowances early, you’re protected if your income rises later in the year. This is especially relevant regarding pensions and tapering rules. You could also be less exposed to potentially abrupt and unfavourable rule changes in the Chancellor’s next Autumn Budget.

Bolstering your financial discipline

It’s worth bearing in mind a very personal aspect to investing sooner in the tax year. Making early and/or regular contributions is a good discipline to follow, treating saving and investing as a routine habit, not a last-minute chore.

This consistency reduces the chance of you missing out on opportunities to grow your wealth in a measured way.

Ending tax year-end stress

Leaving everything until late in the tax year can trigger a number of downsides. From rushed decisions and resulting errors to potential missed allowances and sudden pressure on your cashflow. All this is avoidable by acting sooner.

Starting early can spread the effort and makes planning your investing more considered and proactive.

To sum up…

Starting early when adding to your investments may not change how much you’re allowed to put into pensions and ISAs, but it does change how long your money is working hard for your future benefit. Over time, this difference could make a meaningful difference to your assets.

Your Partners Wealth Management adviser is always on hand to discuss this early and regular investment strategy on your request. Just get in touch in the usual way.