You’ve built up a nice little nest egg for the future – but are you really making the most out of your savings?
If all of your money is locked up in a savings account or cash ISA, it’s unlikely you’ll get a high return. Low interest rates are plaguing savers in the current climate; and if returns are really low, there’s a risk of inflation chipping away at your money. Perhaps it’s time to consider moving from a saver to an investor…
Stocks and shares ISA
For potentially greater gains than a cash ISA, you could consider a stocks and shares ISA, where your money is invested in things like company shares, investment trusts or Government bonds.
More risk? Yes. You do take on more risk when you invest your money than when you save. And the level of risk you take will depend on the types of fund you choose to invest in. When you invest in a stocks and shares ISA, you need to accept that the value of your investment can go down, meaning you could lose some or all of the money you invest.
But there’s a chance of better returns…
If you accept more risk by investing your money, you’ll have a better chance of higher returns.
Just take a look at the chart below. Over the past 10 years, stocks and shares (based on the FTSE All Share index) have returned 5.4% per year, compared to cash at 1.9%. At the same time, stocks and shares are also more likely to go up and down in value more sharply than cash.
Source: Barclays Equity Gilt study, 2015 (gilts are often used to represent cash savings accounts). This chart excludes fees so returns may be lower.
Historic data shows that the longer you can invest, the greater the chance of stocks and shares outperforming cash. Over the last 50 years, stocks and shares have beaten cash 75% of the time when held for five years. This figure rises to 91% when held for 10 years, and 99% when held for 18 years.
But there is a limit to how much money you can put in an ISA in any one tax year. The allowance for the 2016/17 tax year is £15,240, which can be held in cash, stocks and shares or innovative finance ISAs, in any combination you wish.
How about property investment?
If you’re confident that you can commit to the long-term, another option is property investment. Many people see buy-to-let as an attractive investment; however, demand and prices fluctuate, so you need to be prepared to ride out the losses and sit tight on your investments during dips in the market.
According to a recent study cited by the Telegraph in 2016, the average income yield in the UK stands at 4.3%. However, yields vary hugely between regions, meaning location is everything when it comes to generating maximum rental income.
An interactive map on the Totally Money website shows where the buy-to-let hotspots are in the UK. First up is Leeds, with the LS6 postcode generating an average property yield of 10.79%. This is followed by BD1 in Bradford (10.33%), YO1 in York (9.73%) and PR1 in Preston (9.08%).
The key to property investment success? Do your research. Look to buy properties in promising areas; these may not be the cheapest or most expensive areas, but are places people want to live.
Bear in mind that property is a huge financial investment that requires a lot of your time. You should also be aware that rental income is taxable, and from April 2016, landlords have to pay an extra 3% on top of each Stamp Duty band when they purchase a buy-to-let property. On top of that, you run the risk of selling the house for less than the original price you paid, as property prices fluctuate up and down in value.
Investing isn’t for everyone; but if you’re willing to accept a level of risk, then you could be rewarded with greater returns. Find out more about investing for the future here.
We’ve based the information in this article on our understanding of HM Revenue & Customs practice as at November 2016. Tax rules are subject to change in the future and depend on your individual circumstances.
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