Does it pay to be an ISA early bird?

The 2015/16 tax year has ended. Like most people, you probably left it late, but you did some research - perhaps consulted our sister magazine Money Observer's seminal Rated Funds publication Your Fund Choices - made your investment selection and put 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 allowance.

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.

Time in the market

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 the Artemis Income fund 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 the blue-chip companies of the FTSE 100, the 10-year difference was almost £20,000.

Whether the early bird argument will hold true for 2016, in the face of the impending European Union 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 more than it would in a cash account.

Of course, in the chancellor's brave new world of ISAs for every occasion, there is now a tax-sheltered alternative to a cash ISA.

Innovative Finance ISA

The Innovative Finance ISA (IFISA), 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 stockmarket.

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 yet 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% 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 IFISA, 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 eight P2P platforms had received permission from the Financial Conduct Authority (FCA) to offer their loans in an ISA. Over 80 more applications had not yet been approved by the FCA.

Moreover, until very recently, P2P ISA wrappers could be accessed only through 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.

The industry has campaigned for the legislation to be extended to include so-called aggregator platforms, allowing investors to access a number of lenders and in many cases quite different P2P offerings within a single ISA wrapper, but they were not included in HMRC's legislation until mid-March.

Unsurprisingly, 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 investment trusts available.

Be aware, however, that more platforms will be joining the IFISA bandwagon in coming months; it's also inevitable, I think, that over time 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.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.