INVESTMENTS AND SAVINGS
Whether you’re investing for the medium or long term, the option you choose is likely to be influenced by your attitude to risk and investment needs.
There are many ways that you can save or invest, and while we all want our money to grow, it’s important to think about the level of risk you might be willing to take with your hard-earned cash. It’s about achieving a good balance.
You could decide to save a manageable amount each month from your take home pay to cover your living costs, larger expenses and the unexpected.
A bank or building society account may be a good home for your money, or you could open up an easy access Cash ISA (Individual Savings Account).
A Cash ISA is a savings account that allows you to make regular contributions. Unlike a standard savings account, you won’t pay any tax on the interest earned within your Cash ISA.
The other main difference between a Cash ISA and a standard savings account is that there is a maximum amount you can pay each tax year into a Cash ISA. This is £20,000 for the 2020/21 tax year.
Stocks and Shares ISAs
A Stocks and Shares ISA differs from its Cash equivalent by allowing you to invest in:
- Shares in companies.
- Unit trusts and Open-ended Investment Company.
- Corporate bonds.
- Government bonds.
A fund is when investors pool their money together to buy a various range of assets such as bonds, shares and property. If you have a Stocks and Shares ISA, you can usually select different funds to invest in, plus move your money between these without taking it out of your ISA and losing the tax advantages.
Please note that the value of an investment can go down as well as up and you may not get back the amount you put in.
So in addition to ISAs, you could invest in:
Corporate and government bonds – these are loans to the government or private companies that pay you interest.
Investment bonds – these are products which invest your money with the aim of providing you with medium-to long-term returns.
Open-ended investment companies (OEICs) – here your money is held in a pooled fund that is then invested in other funds and assets.
Property – you could invest in rental properties, commercial properties or holiday homes.
Shares – these are a direct investment in individual companies, where you take a stake and if it does well, you may get a dividend – a share in the profits.
Balancing the risk
It’s often a good idea to put your money into different types of assets to help balance the risk. So if one doesn’t perform well, another may do better. Or you could choose a fund which does this kind of balancing for you, sometimes known as a Managed Fund.
Different types of assets can have different risks that need to be taken into consideration when choosing an investment.
What others are asking
What's the maximum amount I can pay into my ISA?
There is a maximum amount you can pay into ISAs each year, and this is set by HM Revenue & Customs.
The maximum yearly savings limit for ISAs is £20,000 for the 2020/21 tax year. You can pay this total amount into a stocks and shares ISA, cash ISA, innovative finance ISA, or in any combination you choose.
From 6 April 2017, a Lifetime ISA will also be available in the market. Despite the new limit of £20,000 across all ISA products, you can only contribute a maximum of £4,000 to a Lifetime ISA each year.
What's the difference between a cash ISA and a stocks and shares ISA?
A cash ISA works just like a savings account, except you won’t have to pay income tax on the interest you earn. Some cash ISAs will give you instant access to your savings, while others demand that you keep the money there for a fixed amount of time. You can also choose between a fixed interest rate or a variable interest rate for your savings.
Stocks and Shares ISAs
You can choose different investments for your stocks and shares ISA, from individual company shares through to a selection of funds run by professional fund managers with a variety of different types of investment style. With many companies you can opt for fund solutions – these aim to make investing easy by offering a package of different investments held in one fund, designed to meet a risk appetite or a particular savings need.
Always bear in mind – with a stocks and shares ISA the value of an investment can fall as well as rise for a number of reasons, for example market and currency movements. You could get back less than originally invested.
Deciding between the two
There are three main factors to consider when deciding between a cash ISA and a stocks and shares ISA and these are: the length of time you’ll be saving/investing, your appetite to risk, and the impact of inflation.
The higher the risk profile of your investments the more likely they are to experience significant fluctuations in value and this is why it’s important to match the investment risks you take with your personal circumstances and the level of risk you’re comfortable with. If you’re not confident in choosing your own investments, a financial adviser can help identify your risk appetite and investments that are aligned to it.
In contrast, cash will rise in line with the interest rate payable on your cash ISA aiming to deliver slow and steady growth.
But if inflation is higher than the rate of interest you’re earning on your cash ISA – the real value of your money will fall over time. Slowly the buying-power of your savings will be eroded and so keeping your money in cash may not be a risk-free option as many savers believe.
It’s important to think about how you’ll use your full ISA allowance if you can afford to. And if you’re looking to maximise your returns in the long term then you should investigate how a stocks and shares ISA could help you do that.
Unsure what’s right for you?
We could help if you’re not sure about what type of investments would suit you best.
Tax rules require careful consideration and may not reflect your individual circumstances. The above is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice. For more information please visit gov.uk