Saving – usually involves putting money aside, bit by bit – to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, for example a broken boiler. Typically, you would put your money into a product, such as a savings account in a bank or building society.
Investing – Typically looking towards the medium and longer term – trying to make your money grow. For example, you might invest in stocks, property, or shares in a fund.
Firstly – it’s very import not to save or invest if you cannot afford to, or if your money is needed for other things – for example, paying off a loan or other debt.
If you are able to save then depending on the type of investment you choose the product may have a starting amount of at least £50 a month or a lump sum of £1,000.
How long should I invest for?
This depends on your goals – whether they are short, medium or long term.
Short-term goals – Usually things you plan to do within the next five years.
Medium-term goals – often things you plan to do within the next 5-10 years.
Long-term goals – typically where you won’t need the money for ten years or more.
For your short-term goals, the general rule is to save into cash deposits, like bank or building society accounts.
This depends on how much risk you’re willing to take with your money to achieve a greater return on your investment.
For example, if you’re planning to buy a property in seven years and you know you’ll need all your savings as a deposit and don’t want to risk your money, it might be safer to put your money into a savings account.
However, bear in mind that your savings will still be at risk from inflation. This is where the interest you earn on your savings fails to keep up with the rate of inflation.
If you’re nearing 30, or older, you might want to consider investing towards your retirement, although other investments can be suitable too.
For longer-term goals, you may want to consider investing because inflation can seriously affect the value of cash savings over the medium and long-term.
You can lower the level of risk you take when you invest by spreading your money across different types of investments. This is called diversification.
You can invest directly in investments, like shares, but a more popular way to invest in them is indirectly through an investment fund.
There are many different ways to access investment funds, for example through products such as an ISA or your workplace pension.
The tables below briefly describe the most popular ways to invest your money.
Also, refer to the note below the table on how the level of fees charged might impact any potential return you receive.
How it works
Shares offer you a way of owning a direct stake in a company – also known as equities. Their value rises and falls in line with a number of factors which might include the company’s performance or outlook, investor sentiment, and general market conditions.
Investment funds (indirect)
How it works
Unit trusts and open-ended investment companies (OEICs)
Funds managed by a professional investment manager. There are lots of different strategies and risk levels to choose from and they can invest in one or more different asset classes.
Investment trusts are companies quoted on the stock exchange whose business is managing an investment fund, investing in shares and/or other types of investment. You invest in the fund by buying and selling shares in the investment trust either directly or through certain products. Once again, there are lots of different strategies and risk levels to choose from.
Insurance company funds
Investment funds run by life insurance companies. When you invest through an insurance or pension product, you often choose how your money is invested. The choice might be from the insurance company’s own funds or into investment funds equivalent to those run by other managers.
Some investment funds adopt a ‘tracker’ strategy. The value of the fund increases or decreases in line with a stock-market index (a measure of how well the stock market is doing). Tracker funds often have lower charges than other types of fund.
These are a special type of investment trust that invests in property.
Investment products (indirect)
How it works
Stocks and Shares ISAs
A tax-free way of investing in shares or investment funds, up to an annual limit. Many unit trusts and OEICs come pre-packaged as ISAs. Alternatively, you can choose for yourself which investments and funds to put in your ISA.
A way of investing for the future, with a contribution from your employer and tax relief from the government.
A way of investing for the future, with tax relief from the government. You can use it instead of or as well as a workplace pension. Often you choose which investment funds to have in your policy.
A life insurance contract that is also an investment vehicle. You invest for a set term or until you die. Often you choose which investment funds to have in your policy.
A life insurance policy that is also an investment vehicle. It aims to give you a lump sum at the end of a fixed term. Often you choose which investment funds to have in your policy.
A way of investing a regular amount or a lump sum as life insurance. It pays out on death, and is often used for estate planning. Often you choose which investment funds to have in your policy.
There’s no guarantee of how your investment will perform. It’s likely to depend on a number of things. For example – in the case of company shares, it depends on the company’s performance and the economic outlook.
With funds, the chance of losing your money or making a big profit depends on the mix of different investments in the fund.
A way to spread your risks is to choose a range of different ‘Asset classes’.
For example, choosing a fund that invests in a mix of:
Fees and charges can reduce your investment earnings. When you invest directly, you usually have to pay dealing charges.
Fees vary by fund, product and provider and won’t always be easy to spot.
Look at the Ongoing Charges Figure (OCF). This aims to allow a direct comparison of costs.
An Individual Savings Account (ISA) is the most common and simplest account for tax-free saving and investing. Money held in ISAs is free from Income Tax and Capital Gains Tax. However, to offset these generous rules there is a limit to how much you can pay into an ISA each tax year. The annual ISA allowance is currently £20,000.
Everybody receives an annual allowance for dividend income received from shares held outside an ISA. The dividend allowance is currently £2,000. Any dividend income above this amount will be taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
Venture Capital Trusts (VCTs) are ‘pooled’ funds that invest in smaller and younger companies. VCTs are high risk as these companies can struggle and fail, and their shares can also be difficult to sell. To offset these risks, VCTs offer tax benefits. These include a 30% Income Tax rebate on investments up to £200,000 each tax year, but only if you have paid the amount of tax being rebated and stay invested in the VCT for a minimum of five years.
The Enterprise Investment Scheme (EIS) allows direct investment into small, unquoted companies (those that are not listed on the London Stock Exchange). Similar to VCTs, EIS offers a 30% Income Tax rebate on investments up to £1 million. This can increase to £2m if anything above £1 million is invested in knowledge-intensive companies. However, you must have paid the amount of tax being rebated and hold the shares for at least three years.
The Seed Enterprise Investment Scheme (SEIS) is similar to EIS, and encourages direct investment into start-ups. However, the tax benefits are more generous than EIS as these companies are younger and may not have fully developed a product or service yet. You receive a 50% Income Tax rebate on investments up to £100,000 as long as you have paid the amount of tax being rebated and stay invested for at least three years.
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