If you are frustrated by pitiful returns on your savings accounts and cash ISAs, it might be time to consider other options.
For those who have never considered moving out of cash before, phrases like ‘stocks and shares’ and ‘investment’ can be a bit intimidating. But, investment doesn’t have to be complicated - there are plenty of options out there - so before you resort to using your life savings as loft insulation, read these safety tips for saving and investing your hard-earned cash.
1.Relax. Your money is safer than you might think
Good news! Even if your bank does go bust, as long as it is authorised by the Financial Services Compensation Scheme (FSCS), they will step in to protect your cash.
The FSCS covers money in current accounts, savings accounts and cash ISAs including any interest earned, up to a maximum £75,000 (cut from £85,000 as of January 1, 2016) for single accounts and £150,000 for joint accounts. Money in a stocks & shares ISA is protected too, up to £50,000.
Just to be clear, the protection for money in stocks & shares ISAs is against the provider of your failing, not the funds your ISA money’s invested in. Sadly, there’s no such thing as compensation for an investment performing poorly.
So make sure your bank or building society is authorised, and keep the money held with any one ‘authorised financial institution’ within the FSCS compensation limits. Remember that an ‘authorised financial institution’, may include several banking and building society brands. A list can be found here.
2. Investing isn't just for high rollers
You don't have to have Donald Trump’s bank balance to invest on the stock market. Most investment funds will accept monthly deposits of £50, and you can invest in stocks & shares ISAs from just £10 a month. Like any investment, a stocks & shares ISA comes with risk. Unlike a cash ISA, the value of a stocks & shares ISA can go down as well as up and growth can’t be guaranteed. But remember, investing is a long game, so you need to be prepared to lock your money away for a minimum of five years, ideally a decade or more. Over time the reward could be a better return on your money than a cash ISA or savings account.
3. There are tax advantages of investing
ISAs are tax efficient. The annual ISA allowance for 2015/16 is £15,240, and you can pay this into a stocks & shares ISA, a cash ISA or a combination, and you pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax (a tax you pay when you sell an asset that’s made a profit).
4. Don’t put all your eggs in one basket
Be prepared for the unexpected. You don’t want to have to pull your long-term investments because the car breaks down or the boiler conks out. Do all you can to leave your investments alone by keeping some cash separately in an easy-access account, ready for action.
5. The bank is always safer than the mattress!
Mattresses and floorboards were never intended as secure homes for hard-earned cash! Yes, you know where it is, but it isn‘t earning a penny in interest and doesn’t stand a chance against inflation, and what if you were robbed or there was a fire? Most home insurance policies only cover a limited amount of cash.
Your best bet is to bite the bullet and keep your cash where it’s safest - in a savings or investment account covered by the FSCS.
Thanks to SunLife.
- There are more money-saving tips in every issue of Yours magazine, out every fortnight on a Tuesday.