Published: 28 February. Written by: Laura Whateley.
When it comes to making the most of your savings, a Stocks and Shares ISA could be your best bet – especially considering that inflation has recently risen. But it’s important to invest sensibly. Here’s what you need to know.
Are you nervous about investing? One of the most common reasons for shying away from Stocks and Shares is a fear of losing money. The value of shares can fall as well as rise, which means so could the balance of your savings.
What you may not realise, however, is that you will be losing money by keeping all your savings in cash, too.
Inflation, which is expected to reach 7 per cent this spring, means the cost of everything from pasta to petrol is on the rise. It chips away at the value of notes and coins, and how far that balance in your bank account will stretch, too.
‘It is impossible to try to keep pace with or beat inflation with cash savings,’ says Roy McLoughlin, associate director of wealth management firm Cavendish Ware and independent financial adviser.
When done in a sensible way, investing in shares – or equities, as they are also known – following some golden rules, including keeping your money in the markets for several years, has traditionally always produced a higher return.
‘Over a period of time, with equity investment the majority will not only beat but outperform cash, inflation and therefore the cost of living,’ McLoughlin adds.
If you are new to investing, a Stocks and Shares ISA is what many financial advisers recommend as a smart starting point. They also emphasise the importance of understanding your appetite for risk.
Here’s what to know before you can decide if a Stocks and Shares ISA is right for you.
What is an ISA?
First things first. ISA stands for ‘Individual Savings Account’ and the main benefit is that the interest or return on any money saved or invested within an ISA is free of tax.
There are several different types of ISA, including perhaps the most familiar, Cash ISAs, where you don’t need to pay any income tax on interest earned. Stocks and Shares ISAs – which are available from hundreds of different banks, investment companies and fund supermarkets, including Vitality – allow you to invest money in many different types of assets traded on the markets. That includes shares, bonds and funds. Any return you make, from cashing in your investments or from receiving dividends, is free of income tax and capital gains tax.
Understand your ISA allowances
There is a limit on how much you can invest in an ISA each tax year (which runs from 6 April to 5 April the following year). This is currently £20,000. This sum can be invested in full in a stocks and shares ISA, or you could choose to split it – for example, £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.
Though you only have one limit per year, and it does not roll over – you use it or lose it – you can top up the same ISA account each year to grow your nest egg over time. Some ISAs let you transfer your old ISA account into them, too. And the money in your ISAs will continue to be tax-free, however large your pot eventually gets.
When should you invest?
‘Whilst Stocks and Shares ISAs have the potential to generate higher returns than a cash ISA, you need to remember that the value of the assets can fall as well as rise, so they are generally geared towards investors with a long-term investment outlook,’ says Kim Jarvis, Vitality Tax and Trusts Consultant.
McLoughlin says this means investing only money you are prepared not to touch for at least three to five years, ideally longer. The longer you leave your money, the more time it has to grow.
‘It is important to emphasise that stocks and shares ISAs aren’t appropriate for really short-term savings, anything you want to access immediately,’ he says. ‘You need a cash account for emergencies, a broken boiler, holidays, unexpected events such as Covid.’
Never invest money in the stock market that you absolutely could not afford to lose, and where you would be forced into debt if you did.
Think of a Stocks and Shares ISA as there to help you grow savings over the medium to long term, for goals such as paying for children’s education, a kitchen upgrade, a big birthday in the future, your retirement or a deposit on a property.
Many advisers suggest you set up a direct debit to drip-feed money in, rather than put all of your savings in at once in a lump sum. This is to help you not only get into the habit of saving, but also to smooth out any bumps in the markets.
What can you invest in?
When deciding where your money should be invested, the most important thing to consider is diversification.
Investing in companies via shares means a risk that your savings could fall in value if a company does not perform as hoped. If you put all your money in one company’s shares (or, as it is often described, all your eggs in one basket), you are taking on much greater risk.
Funds will help you to diversify, splitting your investment between different companies, different geographical regions and types of business, such as US tech stocks or British small businesses, or in the case of ESG (environmental, social and governance) funds, available through Vitality’s Stocks and Shares ISA, funds that invest in companies that aim to avoid doing harm, and that contribute towards a more sustainable future.
The idea of diversification is that even if one company performs poorly, the others you are invested in should be OK, making up for any losses.
You can include several different funds within an ISA, as well as bonds, or unit trusts.
You can use a financial adviser to help you pick the right companies and assets to include in your portfolio, but this will be a more costly approach. Expect to pay several different fees to invest: these will likely include, but are not limited to, a fee for advice, a fee to the company or platform to access a Stocks and Shares ISA, and a fee for the underlying investments within your ISA.
Ready-made portfolios are an easy option for beginners
If you want to take a DIY approach to investing but are new to it, you might consider a ready-made portfolio. Vitality offers twenty ready-made investments, that can be matched to your risk preference, from cautious to adventurous.
‘Do your homework,’ says McLoughlin, and fill out a risk questionnaire to work out how comfortable you are with taking on risk, and watching the value of your investments rise and fall. This may depend on when you need to get hold of the money.
Keep an eye on your investments, but not too closely
‘Just because you invest with one provider, it doesn’t mean you are tied to that provider and particular ISA. If an investor isn’t happy with the way their funds are performing, it’s possible to transfer somewhere else,’ says Jarvis.
But there is also a risk of checking your investments too frequently. Our psychology is such that if we see losses on screen, we may get cold feet, withdrawing all our money just at the wrong time, as the market falls. Sometimes holding your nerve to watch a market climb back up is the most profitable option.
If in doubt, seek advice from a professional such as a financial adviser. ‘Investors will pay a fee for this but cost should not be the bottom line when choosing the right ISA,’ says Jarvis. ‘An adviser will find the right fit matching your risk portfolio to the right ISA.’
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