Three reasons to start an ISA early

Being an ISA early bird could help you maximise any returns you make.

With the £20,000 ISA allowance for the 2022/23 tax year being handed out to savers and investors on April 6, there’s the opportunity to use it straight away.

Many people put off making ISA contributions until the last minute, sometimes waiting until just before midnight at the end of the tax year on 5th April to maximise their full allowance for that year.

However, if you have the money available, and assuming you make a return on investment, you might consider investing as soon as you get your fresh tax-efficient allowance.

If you’re wondering whether being an early bird ISA investor is right for you, here are three reasons why it might be a good idea.

1. The importance of time in the market

Potential growth over the next 12 months could provide a valuable boost to your portfolio.

The critical benefit of investing early is not timing, it’s time. By this, we simply mean that you have your money in the market for longer.

The longer you’re prepared to stay invested, the greater the chance your investments will yield positive returns.

During any long-term investment period, it is vital not to be distracted by the daily performance of individual investments. Instead stay focused on the bigger picture.

2. Benefit from early compounding

The ISA allowance lasts all year, but the sooner you start investing, the sooner you can start to benefit from compounding, which is where your income can earn returns.

As long as you are patient and have plenty of time before you need to tap into your investments, you should benefit from the snowball effect of compound growth as the years roll by.

By compounding the returns over the longer term you can potentially help your money work harder without lifting a finger.

While most people don’t have £20,000 waiting in the wings to be invested in an ISA, the good news is that you can still benefit from compounding returns by investing amounts regularly as soon as the tax year starts.

3. The sky is the limit

While individuals have a tax-efficient allowance of £20,000, there’s no limit to how much the value of your investment ISA can grow. By taking full advantage of the allowance you could potentially grow a savings pot worth hundreds of thousands of pounds over time. In fact there are now 2,000 ISA millionaires in the UK according to new data¹. The top 60 have pots averaging a whopping £6.2 million.

The investors in this sought-after club will have had a combination of maxing out their ISA allowance each year but also some very generous investment returns.

By saving and investing hard each year you can aim for the top.

Remember, if you don’t have a lump sum, you can still benefit by investing small amounts regularly from the beginning of the new tax year.