ISAs - Lump sum or regular saving?

The traditional picture of an ISA investor is of someone who waits until the April tax deadline is imminent then starts to panic. It’s not an entirely false picture, either, otherwise why the surge of ISA marketing that appears in February and March and the lengths to which some providers will go to be able to accept business up to the last minute?

But there is another way: regular saving. This option is offered by many providers of both Cash ISAs and Stocks and Shares ISAs. Setting up a direct debit is straightforward enough and if you wish to add more you can top up the pot with extra lump-sum payments whenever you want, as long as you remain within the allowance limits.

The minimum monthly contribution requirements for regular savings schemes are normally quite low – perhaps as little as £10 a month. Not only does this encourage modest savers and those with limited means but it also allows you to save smaller sums direct from income.

There is also a strategic advantage in investing regularly over the course of the year, rather than contributing a lump sum dictated by the timing of the tax deadline. The principle of ‘pound cost averaging’ is well established: it simply means that when stock market prices are rising you buy progressively fewer fund units or shares and when the market is falling you pick up more at cheaper prices.

This strategy can result in investments being made at a lower average price than might otherwise have been the case and works best when markets are volatile.

It also means you don’t have to be too concerned about the possibility of investing at the top of the market and seeing the value of your portfolio plummet. Sure, some purchases will be made at the peak but these will be balanced by those you pick up in greater numbers at the trough.

If you do prefer to invest a lump sum, it makes sense to start planning it at the start of the financial year rather than leaving it close to the deadline.

Many investors do, in fact, make a lump-sum investment right at the start of the year. Money placed in a Stocks and Shares ISA does not need to be invested straight away as cash can be held in the account pending investment. However, the rate of interest paid on such cash by ISA providers tends to be pretty low, even by current standards, so it really needs to be put to work without too much delay.

There is no need to feel pressured into investing the full amount straight away. If you feel the time is right, fine – but if not wait until the markets are more favourable. The minimum opening investment varies between providers but a typical top-up minimum is £500, so you have reasonable flexibility, although this may be limited if you want to invest in funds that themselves have a relatively high minimum level.

 

This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements.

The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance.

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