As we near the 5th April, the scramble to make last minute ISA and pension contributions is a reality.
Each individual is able to contribute £20,000 (18+) or £4,368 (<18) into an ISA each tax year. Into a pension, up to £40,000 can be contributed each tax year, of which tax relief is available on up to £3,600 or your relevant earnings whichever is greater.
Once in an ISA or pension, your investments can grow free from income tax and capital gains tax.
But why wait?
With 365 days in a tax year in order to make the ISA subscription or pension contribution, it seems absurd to wait until the very last minute.
Take an ISA contribution of £20,000, for example. Our bdb 60% equity portfolio has returned on average 7.41% per annum (01/02/2005 – 31/12/2019) and so you could expect a return of £1,482 if you had made the ISA contribution on the first day of the tax year rather than the last. This return would be compounded each year. If you assume the above return, by making the contribution a year earlier, you would be c£3,000 better off after 10 years.
Here at bdb, our tax-year end planning begins on the 6th of April each year. We don’t wait until the last minute to ask our clients if they would like to make use of their annual allowances.
Whilst you are not guaranteed a return of 7.41% each year (the bdb 60% equity portfolio returned 7.38% for 18/19, 1.89% for 17/18 and 18.88% for 16/17), at bdb we believe that it is not timing the market that matters but time in the market.