With the UK in lockdown there is less opportunity to spend money as the only retail outlets that are open are for essential goods only. As a result of this, many people may find they have extra income that would usually be spent on things such as clothing, socialising or holidays. What are the options for investing these funds?
The most tax efficient vehicle for investing is in a workplace pension scheme. If you already contribute to a pension scheme you should consider increasing your personal contributions, or if you are not a member you should enquire about joining. Not only will your contributions get tax relief at your marginal rate of tax, but in some cases an employer will increase their contributions in line with your increases.
Pension contributions are invested in the stock markets and as equity prices are at their lowest level for years it is considered a good time to buy.
The main drawback of pensions is that as investors are unable to access their funds until age 55 this is a long term investment so is not suitable for investing funds that may be required in the short to medium term.
Individual Savings Accounts (ISAs)
ISAs are tax free savings accounts offered for people living in the UK. You can save up to £20,000 per tax year. Unlike pensions, tax relief is not available but any investment growth and interest is not subject to tax.
There are 5 types of ISA:
- Cash ISAs
As funds are only invested in cash they are very low risk, but rates of interest are also very low.
- Stocks and Shares ISAs
Funds are invested in equities, bonds and other funds. More risky than cash ISAs, although investors can choose what level of risk they are comfortable with when investing. Rates of return can vary depending on stock markets and other economic factors.
- Innovative Finance ISAs
Funds are invested in peer to peer loans as opposed to cash or stocks and shares. Peer to peer lending involves considerable risks and are not covered by the Financial Services Compensation Scheme (FSCS).
- Lifetime ISAs
Lifetime ISAs (LISAs) allow investors to save up to £4,000 per year towards a first home or retirement. The government adds a 25% bonus to savings each year. LISAs are only available for investors aged 18 to 40 and there are penalties for withdrawing cash if not used for a first time home purchase or retirement.
- Junior ISAs
Junior ISAs are available to children under 18 provided they live in the UK and do not have a child trust fund. Anyone can open an account for an eligible child but they must be managed by someone with parental responsibility until the child is 16. When a child is 16 they can take responsibility for the management of the ISA themselves, but cannot access the funds until they are 18. The annual limit for a Junior ISA is £9,000.
For basic rate taxpayers, the first £1,000 of interest earned is tax free and this reduces to £500 for higher rate taxpayers. Given the current low rates of interest this means that interest is tax free for the vast majority of savers.
There are 5 main types of savings accounts:
- Easy Access Accounts
Easy access accounts allow savers to withdraw their money quickly and easily. Interest rates are usually low, although some offer some introductory bonus rates. There may be limits on the amount of withdrawals savers can make without losing interest.
- Notice Accounts
Savers have to give notice to the bank when they wish to withdraw money (usually 30, 60 or 90 days). Although notice accounts traditionally offered higher rates of interest than easy access accounts this is no longer always the case.
- Regular Savers
Requires savers to deposit money each month and offer fixed or variable rates. Often offer higher rate of interest but are only suitable for savers who wish to build up their savings gradually.
- Fixed Rate Bonds
Savings accounts that offer a fixed rate of interest on your cash for a set period of time. While they offer good rates of interest, your cash will be unavailable until the end of the term of the bond. Generally the longer the term of the bond the higher the rate of interest.
- Premium Bonds
Premium bonds are a form of savings where no interest is paid. Instead, the returns are paid in the form of a monthly prize draw in which all of your bond numbers are entered and you could win a tax free prize from £25. The minimum investment is £25 and the maximum holding permitted is £50,000. The more bonds you hold the greater the chance of winning a prize in the monthly draw.
This document is for guidance only and should not be construed as advice. For advice in this area please speak to a professional financial adviser.