Saving money in an ISA can be a very safe way of growing your wealth over time. However, this is obviously not the case 100% of the time. Investing carries an element of risk however you do it.
Some savers are totally risk-averse, while others are prepared to take a degree of risk. The quandary here lies in the fact that the safest options typically offer poor returns, while the best vehicles for top interest have a certain amount of risk attached to them. So, when answering the question – are ISAs safe? – we have to define the type of ISA we’re talking about.
Let’s begin by looking at some ways of saving that are traditionally considered “safe”. The MoneySavingExpert.com website refers to something called the savings fountain, which is perhaps a good place to start when discussing the topic of “are ISAs safe?”
- Lifetime ISAs
- Bank account savings
- Regular savings
- Fixed-rate cash ISAs
- Cash ISAs with easy access
- Fixed-rate savings
- Normal savings
These are all traditionally “safe” ways to save money. However, they also tend to come with fairly poor interest rates. Generally speaking, interest rates range from 0.5% up to about 1.7%. To attain higher levels of returns, it can be necessary to sacrifice immediate access to your savings, or to take on a greater degree of risk.
The difference between saving and investing
It’s a common misconception to confuse the words “saving” and “investing.” The difference is fundamental to the notion of “safety” financially. So, let’s take a closer look.
- Saving is the process of setting money aside in a safe environment and allowing it to accrue interest. Instant access is desirable.
- Investing means using cash to buy assets that you hope will appreciate over time, potentially generating much higher returns.
So, to answer the question “how safe are ISAs?”, you can consider certain investment vehicles to be relatively safe, while others inherently take on more risk. This is, however, always dependent on circumstances and you should do extensive research before committing any cash.
Inflation outstrips interest on savings
The difficulty that savers face currently is the appallingly low interest rates on savings accounts. Even if you do your research well and manage to open a savings account that offers a higher rate of interest, it is still often well below the current rate of inflation. At the end of May, inflation reached 2.1%, according to the ONS website, 0.5% higher than the 1.6% rate at the end of April.
Inflation has, unfortunately, been on the rise, as can be seen from the figures above, and it could rise further.
Of course, we don’t know what the Bank of England will do regarding the basic rate of interest. At the moment, it’s as low as 0.1% – the lowest it has ever been. All savings accounts tend to be (at least in part) driven by this rate. If the rate increases significantly, while that would be good for savers, it can also be a catalyst to inflation soaring, something which the Bank of England will try to avoid.
This means that traditionally “safe” savings accounts could be in for a rough time, as the money they tucked away will be losing value in real terms with every leap of inflation. While savers are unhappy with the situation, many have reservations about investing their savings because they question, are investment ISAs safe?
The truth about investment ISAs
In the tax year 2017/2018, the number of Stocks and Shares ISAs in the UK was 2.9 million. That figure has subsequently dropped to 2.4 million, and is likely to be on the back of investors asking themselves, is my ISA safe?
This fear was, of course, exacerbated by the Coronavirus pandemic. With COVID-19 decimating world economies, a lot of people panicked, believing that their investment portfolios would be similarly affected.
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For a short while, it did look as if that might be the case. Stock markets can be volatile, and when something like a pandemic comes along, prices can fall very quickly. However, it’s also true that the markets recovered quickly.
So when answering the question “are stocks and shares ISAs safe?” Yes, they are a lot safer than some people think, providing they are being used as long-term investment vehicles. If you are forced to take out money from stocks and shares ISA when the market has just collapsed, then you could be in trouble. But, on the other hand, if you can afford to wait to ride out any storms that arise, the odds are very much in your favour that your portfolio will recover its value grow over time.
Not for the inexperienced
The fact of the matter is that investing in stocks and shares does carry a certain element of risk. It’s certainly not something you should attempt to invest in yourself unless you have substantial experience, which is where wealth managers like Moneyfarm enter the picture.
The potential volatility in the equity market shouldn’t be underestimated – something which has been highlighted by the events of the past year and a half. While some investors are experienced enough to manage their own stocks and shares portfolios, it’s something that should often be left to the professionals.
When you open a stocks and shares ISA with Moneyfarm, you have several options open to you which relate to how your portfolio will be managed and the chosen risk level with which you feel comfortable. Your portfolio will be designed around your preferences and actively rebalanced to ensure it’s always fit for purpose.
The benefits of stocks and shares ISAs
There are several benefits to taking out a stocks and shares ISA. The first is that you have a personal ISA allowance of £20,000 per annum. Any returns made on contributions to your ISA up to this sum are tax-free.
This type of ISA is effectively a tax wrapper. In addition to your personal annual ISA allowance, any interest your stocks and shares accrue is also tax-free – so are withdrawals. The biggest advantage, however, is the returns that stocks and shares ISAs can make, which often far exceed those made by “safe”, secure savings accounts.
The one thing to always bear in mind with any type of investment is that the value of your portfolio can go down as well as up. However, you can manage that risk to a certain extent by considering the following.
The great thing about fully managed investment ISAs is that your portfolio will be built using an array of bonds, funds, and stocks. Investors who are less risk-averse can put the majority of their money into fixed interest investments such as bonds. Those who are prepared to accept a slightly higher risk would invest in other equities with the hope of making higher returns.
Spread contributions over the year
Rather than making one lump contribution per year into your ISA, divide contributions over 12 months. Where markets are always evolving and changing, this allows you to utilise a well-established technique referred to as pound cost averaging.
Even with all of the suggestions made above, there will always be some degree of risk to investing in an ISA, which is why using the services of wealth management specialists like Moneyfarm can make all the difference.