The 2015/16 tax year has ended. Like most people, you probably left it late, but you did some research – perhaps consulted Money Observer’s seminal Rated Funds publication Your Fund Choices – made your investment selection and ploughed some money into an Isa.
The last thing you want to contemplate now, I’ll wager, is tying up another chunk of cash in order to maximise returns from the new tax year’s Isa. Nonetheless, that’s the call to action being disseminated by a number of fund platforms, no doubt anxious to minimise their fallow post-April investment period. And there is some sense in their argument.
The bottom line is a simple proposition: that if you have spare cash available and you invest at the start of the tax year, your money is in the market for longer. While – in the short term at least – this could be an unfortunate strategy in a bear market, it tends to pay off in a bull environment.
Adrian Lowcock, head of investing at Axa Wealth, says this has been the case over the past decade: someone who invested their full Isa allowance in the FTSE 100 index at the very start of each tax year since 2006 would be £4,500 better off than their fellow investor who always left it until the last minute.
And that difference may be more pronounced when other markets or the value added by a good active manager are factored in. Lowcock ran the same figures for Artemis Income and found that over the past decade early birds would have gained almost £8,500 over last-minute Larrys; for Franklin UK Mid-Cap, which does not focus on blue-chip companies, the 10-year difference was almost £20,000.
Whether the early bird argument will hold true for 2016, in the face of the impending EU referendum and slowing global growth, is questionable. However, attempting to time the market is equally questionable; and simply holding your cash on deposit certainly won’t reward you. In general, for long-term investors, £15,240 in a well-diversified portfolio of funds run by consistently reliable stockpicking managers – or alternatively in a single multi-asset fund where the manager deals with asset allocation – is likely to grow over most tax years, and by considerably more than it would languishing in a cash account.
Of course, in the chancellor’s brave new world of Isas for every occasion, there is now an tax-sheltered alternative to a cash Isa. The Innovative Finance Isa, available since April, provides access to peer to peer (P2P) lending platforms, where investors can get a decent return on their money without exposure to the risks involved in the stock market. (However, it’s important to recognise that these loans are by no means ‘risk-free ’ in the same way a bank account might be considered to be, and also that the P2P industry has not experienced an economic downturn and the increase in loan default rates that’s likely to bring.)
It’s a burgeoning industry: UK P2P lending reached £2.4 billion in 2015, with yields of 6-10 per cent available, so the opportunity to receive tax-free interest in an Isa (and potential capital gains if a loan is sold on, as they can be on some P2P platforms) is an attractive one.
The trouble is that, having announced the impending IF Isa, the authorities apparently do not have the resources to make it happen in a meaningful fashion. As of 6 April, the launch date of the new Isa, only 11 P2P platforms had received permission from the Financial Conduct Authority to offer their loans in an Isa. Around 80 more applications had not yet been approved by the FCA.
Moreover, until very recently, P2P Isa wrappers could be linked only to individual lender platforms, with their limited number of loan opportunities and specific lending strategies – the P2P equivalent of making an Isa investment with an individual fund manager.
So-called aggregator platforms, able to provide access to a number of lenders and in many cases quite different P2P offerings within a single Isa wrapper, were not covered in HMRC’s legislation until mid-March, after campaigning by the industry. But the late rule changes mean there are no aggregator platforms yet up and running.
Isa early birds therefore currently have only a limited choice of individual lending platforms offering the tax wrapper, though for greater diversification they could look at the handful of P2P trusts available (see page 30 in the Trust supplement).
Be aware, however, that more platforms will be joining the Innovative Finance Isa bandwagon in coming months; it’s also inevitable, I think, that an increasing amount of P2P retail business will be conducted via aggregator platforms that can provide greater investment diversity and administrative efficiency. It’s just a question of how long it will take.