Many savers are unaware of the different products available to them, and that could be causing them to lose money unnecessarily (Source: Oaksmore ISA).
If you are one of them, it is time to look at the options to improve your financial outlook.
The current situation
According to the research:
- 16% of savers are not aware of any type of ISA (Individual Saving Account)
- 75% are aware of traditional Cash ISAs, but not any other type of investment products
- 40% are aware of Stocks & Shares ISAs
- 31% are familiar with Help to Buy ISAs
- Less than 25% are acquainted with Lifetime ISAs
- Just 6% of the population were aware of Innovative Finance (IF) ISAs
This has led to many people opting to put their money into savings accounts which do not perform and are unlikely to keep up with inflation, let alone provide returns. That means that they are losing money in real terms.
What is available?
When thinking about investments, your mind may be taken through endless media reports of failing markets, lost money and potentially movies featuring high-flyers who lose it all.
These representations fail to give a balanced picture and only focus on the dramatics which can sell a newspaper, generate clicks or impress audiences.
However, there are many ways to invest your savings, and many vehicles through which it can be done. The most popular of which is the ISA; launched in 1999. Since 2001, each year has seen at least 10 million new ISA accounts open. (Source: HM Revenue & Customs (HMRC)).
Individual Saving Accounts, or ISAs, are available in many formats and are designed to help you to manage your savings in a way to suit you. Most commonly used ISAs are available in Stocks & Shares (invested) and Cash (not invested) options. Interest received from money held in a Cash ISA is tax-free, while money held in a Stocks & Shares ISA grows tax-efficiently.
Adults have an annual ISA limit of £20,000, which can be split across different types of ISA.
There are six types of ISA. Let’s look at them in more detail:
- Cash ISA: the most basic ISA type. You can deposit up to £20,000 into a Cash ISA. That money is not invested but will gain interest based on the rate offered by your bank or building society.
- Stocks & Shares ISA: Your money is invested in stock and shares. Depending on your provider and personal preferences, you can have as much or as little control over these investments as you wish.
- Innovative Finance ISA: Deposits you make into an Innovative Finance ISA are available to invest in peer-to-peer lending. That means that you could choose to invest your savings in new business ventures. This option carries significantly more risk, due to the uncertain nature of new businesses, but does have the potential to help independent business owners to get off the ground as well as actively helping to fund something you are interested in. Innovative Finance ISAs are subject to the £20,000 ISA Allowance.
- Junior ISA: Designed for under 18s, a Junior ISA can be opened by a parent or guardian of a child under the age of 16. Junior ISAs are available in both Cash and Stocks & Shares options and will be controlled by an adult until the named child turns 16. At this point, control passes to the child, though they cannot make withdrawals until they are 18. Junior ISAs are subject to an annual tax-free contribution limit. In the 2018/19 tax year, this stands at £4,260.
- Help to Buy ISA: Designed to help people start saving toward the deposit on their first home, Help to Buy ISAs can be opened by anyone aged 16 and over. In the first month of opening the account, it is possible to deposit up to £1,200. Each month after this is subject to a £200 maximum. Help to Buy ISAs benefit from a 25% government bonus. That’s effectively free money.
- Lifetime ISA: This ISA is also developed with first-time buyers in mind. Available for anyone aged 18-39, Lifetime ISAs are subject to a maximum annual deposit of £4,000. However, at the end of each tax year, a government bonus of 25% of the value of those deposits is added to the total. This money is available to withdraw, without incurring tax, for two purposes; as part of the deposit on a first home, or as retirement income once you reach the age of 60. Any other withdrawals will be subject to punitive fees of 25% of the amount withdrawn.
The effect of a lack of awareness on risk management
Muhammad Ali once said: “He who is not courageous enough to take risks will accomplish nothing in life.”
He was probably not talking about the best place to keep your savings at the time, but if he were, he’d be closer to the truth than you might think.
For example, 61% of UK adults have more than £1,000 in savings, but a quarter of them are reluctant to put that money into investments, as they do not want to take the risk (source: Oaksmore ISA).
Unfortunately, by avoiding investments altogether, savings could be put into a position where they are guaranteed to see a lack of growth and may even be likely to lose value in real terms.
Why is this?
Put simply, it doesn’t matter where you keep your savings. They will always face some amount of risk:
- Investments: Can both rise and fall, depending on market conditions.
- Savings accounts: Are unlikely to have interest rates which match inflation, leading to a loss of value in real terms over time.
- Cash: If you are storing your savings in physical cash ( .e. under the mattress) you face two types of risk; devaluation due to a lack of interest and loss of buying power, as well as an increased risk of theft or physical damage, due to fire or pests, among other causes.
It is important not to let a lack of understanding of the account types available, affect your ability to position your money in the best place to generate potential returns.
To find out more and discover what products you could be missing out on, get in touch with Sarah or Bev on 0115 933 8433.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.