4 min read 27 Jan 20
Summary: Are you one of the 70% of ISA savers who only stick with cash?
Whatever you’re putting money aside for, there’s likely to be a role for Individual Saving Accounts, or ISAs, which are home to roughly £600 billion of the UK’s non-pension savings.
If you’re looking to grow your money over many years, perhaps to fund a dream purchase or help you in retirement, cash might not be the right option. Especially when the interest rates on cash ISAs are near all-time lows.
Up to £85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, unlike stocks and shares or fixed interest investments which are less secure.
Investing in the markets through a stocks and shares ISA might offer you exposure to higher returns than cash alone can deliver, if you are able to accept some level of risk.
Here are five reasons why you might consider investing some, or more, of your savings in a stocks and shares ISA, which could help you realise your long-term financial ambitions.
One of the appeals of cash savings is that you can access them when you want. Your interest is also generally fixed, so their value won’t swing up and down like share prices can. It’s sensible to keep enough cash to cover any short-term needs, but keeping too much of your savings in cash can carry a cost.
When the price of goods and services, or inflation, is however rising faster than the rate of interest you receive on, say, your cash savings in a UK bank or building society, the ‘real’ value of the amount is eroded which could leave you worse off.
By accepting some level of risk and investing your money in assets such as company shares, bonds and property, you could potentially achieve higher returns than cash alone can offer. Returns from investing can never be guaranteed, however, and you should remember that past performance is no guide to future performance.
Relying on any one asset could expose you to an unnecessary risk of losing money. The key to managing risk over the long run is holding the right blend of assets that can collectively perform in different circumstances.
A wide range of investments can be held in a stocks and shares ISA. As well as individual company shares and bonds – both government and corporate – you can invest in funds that package several assets. Some funds focus on one type of asset, and sometimes even one region, while others hold a mix of assets from around the world. A broad and diversified portfolio should help spread the risk of individual assets failing to deliver returns or falling in value.
The beauty of investing through an ISA is any income you receive, and any capital gains from a rise in value of your investments, will be free from personal taxation, irrespective of any other earnings you have.
Let’s say you are sitting on an investment profit of £25,000 – outside of an ISA you could be facing a tax bill as high as £5,000 if you were a higher rate taxpayer. Investing through an ISA could save you a significant amount of tax.
It’s important to remember that ISA tax rules may change in the future. The tax advantages of investing through an ISA will also depend on your personal circumstances.
Professional fund managers are constantly preparing for and reacting to changing market conditions, adjusting their portfolios accordingly. Your circumstances – and attitude towards investment risks – are also likely to evolve, meaning different types of assets will become more or less appropriate over time.
For example, if you’re close to retirement you may want to reduce the level of risk in your portfolio, or move towards income-generating assets. It’s sensible to review your investments regularly – even as a long-term investor.
Within an ISA, you can reallocate your portfolio according to your outlook and needs at any time without losing any of the tax benefits. You can also move money from your cash ISA to your stocks and shares ISA, or vice versa, as your short-term cash needs change.
Investing in stocks and shares through an ISA could hardly be more straightforward. You can choose to invest a lump sum or set up a regular savings plan that fits your circumstances and your financial goals.
You’ll quickly find that there are a lot of different approaches to investing, each with their own risk and return profiles. It’s important that you only invest in products that are suitable. Before dipping your toes in the market, you should consider whether you need independent financial advice to help you establish an investment approach that is right for you.
When you're deciding how to invest, it's important to remember that the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. Past performance is not a guide to future performance.