Savings & Investments

Should you save or invest? The answer will depend on your goals and financial situation.

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Savings

Everyone should do their best to build up an emergency savings fund to provide some financial security in the event something was to go wrong. As a general guide, this should be around 3 months’ worth of essential expenditure.

Savings should be in the form of cash on deposit in a bank or building society, so they are easily available at short notice. You could also make use of Cash ISAs to benefit from the tax-efficient wrapper offered.

Other forms of savings to consider could include National Savings & Investments accounts, as these are backed by HM Treasury, which means they are 100% secure.

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Investments

If you have surplus funds available that are unlikely to be needed over the medium to long term, you should consider investing your money. If you are prepared to take some risk with your capital, you should try and achieve a greater return on your money, as inflation can seriously affect the value of cash savings over the medium to long term.

Investing in the stock market can provide an opportunity to achieve greater returns over the long term instead of leaving your money in cash deposits. Whilst your investment can be subject to fluctuations in value as markets fall and rise, you can reduce the level of risk you take by spreading your money across different types of investments and asset classes.

Different types of investments you might consider include:

• Stocks & Shares ISAs – suitable should you wish to invest your money over the medium to long term but protect any capital growth or income from tax. For the current tax year, you can invest a maximum of £20,000 between Cash and Stocks & Shares ISAs.
• Unit Trusts and Open-Ended Investment Companies (OEICs) – these are professionally managed collective investment funds which pool money from investors and buy shares, bonds property, cash and other investments. They are suitable for investors who wish to invest in shares or other assets but do not have the expertise to make their own individual asset selection. Tax on these investments is payable on capital gains (when the investment is encashed) and dividends/interest in excess of the capital gains tax allowance and income tax allowances each tax year.
• Investment Bonds – these are life insurance policies where you invest a lump sum in a variety of available funds. You can make regular withdrawals of capital each year up to 5% of the initial investment (for a period of up to 20 years if 5% is withdrawn each year or until the original capital has been withdrawn if a lower percentage is taken) without any immediate tax liability; this tax is deferred and paid when the Bond is cashed in. All gains and income earned are taxed at 20% and paid directly from the Bond. On encashment, a higher-rate/additional-rate taxpayer could be subject to additional income tax on any gain (or if the average gain takes the income of a basic rate/non taxpayer into the higher rate band).
• Shares – these 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, including the company’s performance or outlook, investor sentiment, and general market conditions. Tax on these investments is payable on capital gains (when sold) and dividends in excess of the capital gains tax allowance and personal allowances each tax year.

Other investment options could include property, currency or collectables, such as art or antiques.

This is not an exhaustive list and the type of investment that suits your needs will be dependent on various factors such as your objectives, investment timescale and your tax situation now and in the future.