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How to invest money: the best ways to invest your savings in the UK

Every age group has its own specific needs and goals, but no matter which group you belong to, knowing how to invest money here in the UK to grow your money is very important. What follows is a specific guide to which we recommend you refer to when the need arises.


For ease of reference, we decided to centre the how to invest your money guide around three life stages, which are:

  • The under 40s
  • Those who are middle-aged
  • The over 60s

When it comes to setting money aside, we usually put it into savings accounts and invest it in various products.

It’s key to understand the difference between the two concepts as they offer significantly different returns and levels of risk. So, knowing how to make money from savings is very important and so is the question investors ask themselves, where can I invest my money safely in the UK?

The best way to save money

When you transfer money into a savings account, your funds are safe, and returns are guaranteed. For many people, the best way to start saving money is gradually, bit by bit, and they choose Regular Savings Accounts as their preferred vehicle. Others, who want instant access to their savings, might choose an Easy Access Savings Account.

There are several options, and if you are wondering what is the best way to save money. The most popular choices are:

  • Easy Access Accounts – Ideal for savers who are concerned they may need to access their savings in a hurry. The downside is the low-interest rates offered – typically between 0.10% to 0.70%, variable. In addition, some accounts impose a limit on the number of withdrawals you can make over 12 months.
  • Notice Savings Accounts – With these accounts, you must notify the account provider 30, 60, or 90 days before making a withdrawal. Interest is typically between 0.70% and 1% and is variable. Usually, lower interest rates are given to shorter notifications.
  • Regular Savings Accounts Suitable for those who can save a steady amount of money every month. Some providers won’t permit withdrawals during the life of an account; others will. Accounts either offer variable or fixed interest rates. Typical rates are between 1% and 2.5%.
  • Fixed Bonds – These are suitable for saving more substantial sums of money and getting the best interest rate. Fixed-rate accounts can offer interests up to 2.2%, but you cannot access your savings without incurring a significant financial penalty.

The choices shown above are some of the popular ways to save money in the UK. However, it all comes down to personal decisions based on an individual’s circumstances.

The most noticeable thing about these typical savings accounts is that the interest they pay is disappointingly low, especially when considering UK inflation, which currently stands at 5.5%. However, some experts predict that it will rise even higher during the course of the year, to 7%.

The best way to save money for UK residents may be to invest it, not save it. But whereas your money is safe in a savings account, it is at risk when you invest it, so you must consider how to invest money while taking your attitude to risk into account.

Under 40s guidelines: Investing for beginners

It’s preferable to start investing at a young age – the younger, the better. If you are fortunate, your parents or legal guardians might have decided to start investing on your behalf when you were a child. It’s a great way how to start investing without even knowing it.

Suppose you are lucky to have parents who will gift you an investment portfolio at a young age. In that case, they should also give you the best beginner’s guide to investing by encouraging you as a child to follow the progress of the account or portfolio, thereby arousing your interest.

If you weren’t one of the lucky ones, it’s never too early to start, and you get the green light at the age of 18. However, investing for beginners in the UK may seem a little daunting at first. Not only is there the risk factor to consider, how to start investing in UK products and where to start investing can seem difficult to fathom.

In this article, we not only discuss how to invest for beginners, but we offer the best investment tips for beginners. So, your young investor’s guide starts here.

Investing basics for beginners – Understanding compound interest

The first thing to get your head around is the power of compounding. What do we mean by that? We are talking about compound interest. It is the type of interest that earns interest on itself.

The interest made in one year is added to the initial investment, and after that, it gets added to the ongoing annual total on which it makes more interest. There are several compound interest calculators to illustrate the process for better understanding.

As far as long-term investment options go, compound interest gives substantial growth. Opening an account that offers this type of interest is one of the top financial planning tips for young adults.

Another top tip on investing money for beginners is choosing long-term investments. We’ve just mentioned them in conjunction with compound interest, but it’s not only growth where investing in the long-term makes suitable investments for beginners. It also helps to reduce risk.

It’s all about the relationship between volatility and time. Basically, the longer the period over which your investment is extended, the more likely your investment can weather any downward market trends. Investing for long-term growth is much less risky than short-term investments.

How to start financial planning

While investing money for beginners is highly desirable, it is not something you should rush into. Instead, it would be best if you first learned how to do your own financial planning.

People want to invest in the hope of achieving financial security, and personal financial planning for young adults is the key aim.

To get off on the right foot, young wannabe investors need to identify their short, medium, and long-term financial goals. If you fail to set these targets, you are likely to spend more than you should, which could mean you will come up short when money is needed.

Financial planning for students is important too, but even the most astute can’t predict everything that could impact their financial situation, as the recent COVID-19 epidemic aptly demonstrates. But at least thinking ahead forces you to contemplate what could happen and try to be ready as best you can. It doesn’t apply only to wannabe investors. It’s something that all investors should do as an ongoing process throughout life.

Considering the best long-term investments

One of the most popular long-term savings options is ETFs. The initials ETF stand for “Exchange Traded Funds.”

An Exchange-Traded Fund is a pooled fund shared by several investors. They are designed to track a specific asset, commodity or index and can be bought and sold on a stock exchange in a similar way to regular stocks and shares. They can be structured to track single commodities or extensive, diverse collections of securities. ETFs require no active managing as they are passive investments.

ETFs are pre-restructured portfolios. Moneyfarms Portfolio 4 is an excellent example of such. It’s a great way of investing in stocks for beginners as it is a long-term investment, so less risky. It also contains a wide range of products in its portfolio which provides another guard against risk – that of diversity.

Of course, you want to keep as much of your hard-earned cash out of the taxman’s hands as possible, and this is something we’ll look at next.

Investing in stocks and share ISAs and legally avoiding paying tax

The best way to invest money in the UK and legally avoid paying tax is to use a tax wrapper. Investment accounts like ISAs wrap themselves around the assets within, protecting them from some or all the taxes that the taxman would otherwise claim.

One of the best things to invest in at a young age is an Investment ISA, also known as a Stocks and Shares ISA. We talked about investing for beginners while they are still children, and two of the long-term savings options you can go for are Junior Cash ISAs and Junior Stocks and Shares ISAs.

Both types of Junior ISAs (JISAs) evolve into ordinary adult ISAs when the child reaches their eighteenth birthday.

We already discussed the poor interest rates that savings accounts offer, and Cash JISAs are not much better. However, the returns on Stocks and Shares JISAs are considerably better. According to this Moneyfarm article, simulated Investment ISAs saw an average return of 9.64% per annum over the past decade, as opposed to Cash ISAs, which only saw a return of 1.21%.

But the reason that Stocks and Shares ISAs are so popular is not just the significantly better interest rates they tend to earn but also the fact that they are tax wrappers. Under normal circumstances, you don’t have to declare them on tax returns, and they are not subject to income or capital gains tax.


Can mortgages and investments coexist?

Rather than investing unallocated cash, some people prefer to make additional payments to their mortgage accounts to lessen the outstanding balance and pay the mortgage off earlier.

Although a mortgage payment is undoubtedly an option, it may not be the best place to invest money in the UK because you don’t have access to the funds. In other words, it’s not really an investment. There is also the fact that you can incur charges or fees for early settlement.

You may be better off allowing the mortgage to run its course as it is usually the cheapest form of loan you will ever get. However, if you do have any unallocated cash left over, you can put it into a Stocks and Shares ISA and reap the benefits of the higher interest rates they offer.


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Investing in children

Having already discussed the benefits of opening or paying into a Junior ISA for your children or grandchildren in terms of starting them on the road of investing for beginners, some people also see it as an obligation to help secure a child’s financial future. It is a moral responsibility and one that doesn’t eat into your own adult personal ISA allowance. But what about your financial future?


How to start investing for retirement

If you’re asking yourself should I start a pension, the answer is yes, you should, and the earlier, the better.

All UK residents who have been employed and paid their national insurance contributions will be entitled to a state pension. But it won’t afford you much of a lifestyle if you rely solely on state pension when you retire, which is why workplace pensions were introduced.


Workplace pensions

Workplace pensions first appeared in 2012 when employers were forced to offer them to their employees. Today all employers are obliged to do so. So, if you are over 22 years of age, employed full or part-time, and you earn over £10,000 per annum, you don’t have to wonder should I start a pension; you will be automatically entered into a workplace pension scheme.

Investing for your retirement

If you start financial planning in your 30s, one of the things you should think about is your retirement. For most people, this means thinking about some sort of pension. We’ve already talked about workplace pensions, and they can either be defined benefit or defined contribution schemes.

Defined benefit and defined contribution pension

These types of pensions work the same way in as much the contributions are invested in funds chosen by the pension provider. These schemes are beneficial because, in effect, you are getting free money thanks to your employer’s contributions.

Whereas defined benefit pensions are funded solely by employers, defined contribution schemes are contributed to by both employer and employee. As a result, defined contribution schemes have primarily replaced defined benefit schemes.

There is another type of workplace pension called a workplace SIPP. However, it is extremely rare. The initials stand for Workplace Self Invested Personal Pension.

The vast majority of SIPPs are private. If you aim to manage SIPP investments yourself, you should be an experienced investor. If you are not, seek the advice of an independent financial advisor.

Other forms of investing for your retirement

You don’t have to rely on your state and workplace pension. However, many people start financial planning at 35 or later because they’re not satisfied that their state and workplace pensions will support the sort of lifestyle they hope to enjoy in their retirement. So, they look elsewhere to things like Lifetime Stocks and Shares ISAs.

People who want help buying their first house can use Lifetime ISAs. They also use it to supplement their pensions. You can only contribute £4,000 per annum into a LISA, but the government will give you a 25% top-up. Unfortunately, you can only contribute to them up to your 40th birthday. That’s why most people opt for Stocks and Shares ISAs.

The table below shows what a Stocks and Shares ISA would be worth at your chosen retirement age, assuming you contribute £250 per month and the compound interest rate is 6% per annum.

Starting a pension at 50 is rather late, but even so, if it’s in the form of an Investment ISA and you work on a retirement age of 67, by that age, your investment could be worth approximately £81,100.

Starting AgeProjected value of an Investment ISA
Investing for your retirement in your 20sBy the time you’re 55 – £291,000
Investing for your retirement in your 30sBy the time you’re 55 – £151,000
Investing for your retirement in your 40sBy the time you’re 55 – £67,600
Investing for your retirement in your 50sBy the time you’re 67 – £81,100

The above table assumes the start date of your ISA is when you are 20, 30, 40 or 50.

Middle-aged guidelines: How to invest for your retirement

Having no retirement plan is likely to lead you into trouble. While it’s understandable for young people to put off thinking about investing for their retirement, by the time you are approaching or are in your middle age, it’s something to which you need to pay serious attention.

Having already looked at the basics of pensions and other alternatives, let’s now turn our attention to providing some top retirement planning tips.

Most people reach the highest levels of their career and achieve their best earnings during their middle-aged years. Therefore, this is the time to take advantage of it in terms of having the right investment plan or plans in place.

Investing money that the UK HMRC won’t interfere with

The more you earn, the more the taxman will take off you, so whatever personal investment plan or plans you consider, you need to optimise them in terms of income tax. This is where ISAs score best. It’s important to make full use of your personal ISA allowance. You can use up your allowance by investing in ISAs containing stocks and shares, ETFs or ESGs. The current ISA allowance is £20,000 per annum per person, but unfortunately, you can’t carry the balance forward if you don’t make full use of it within the tax year. You lose it.


How to best invest money and help the environment

The initials ESG stand for Environmental, Social, and Governance. These are green investments that are becoming increasingly popular in today’s circumstances in terms of environmental issues and climate change and for this reason people are looking for sustainable way to invest their savings. Knowing which products to invest in to make the best use of your money and circumstances is no easy thing, but you can get constructive investment advice from wealth management companies like Moneyfarm.


Don’t overlook investing money in UK products in the shortish term.

You need to make your money work for you, so check that you haven’t got anything lying around in low-interest savings accounts.

Okay, it’s good to have a little bit set aside that you can access quickly for unforeseen emergencies, but beyond that, some relatively shortish-term investment plans in UK stocks and shares can give you a handsome return.

We talk about long-term investing, but it doesn’t always mean planning for retirement at 60 or over. “Long-term” means five years or more in investment circles, but five years is relatively short. But it’s still long enough to help defuse risk but short enough to make your money work for you and present you with some good returns in the interim.

Considering the safest Investments for retirement

It would be best to consider how to invest wisely for retirement when it comes to safety. Luckily state and workplace pensions are safe but investing in assets like ISAs carries risk. However, when you choose an investment ISA through a wealth specialist like Moneyfarm, they will tailor the risk factor to your appetite or lack of appetite toward it.

They will advise you on what the best investments for retirement are. Sadly, the lower the risk for investment assets like Government Bonds, the lower the interest rate and returns. But one thing is sure: inflation reduces the value of money in real terms. That is why you need an investment vehicle whose performance counterbalances and exceeds the erosion caused by inflation.


Over 60s guidelines: What will you do with your retirement nest egg?

Hopefully, you will have a long and healthy life well past the start of your retirement. This forbes article says if you reach the age of 65, it is expected that you will live another 20 years on average, and if you reach age 75, you can live another 22 years.

Once you stop working, that is the time to review your retirement savings in accordance with retirement lifespan predictions and your retirement needs, so you can decide what a reasonable retirement income will be.

Only you can determine what a good pension amount is and how much monthly income to retire suits you. If you have several pensions, you might decide to spend some of your pension pots on purchasing an annuity.

But the thing with annuities is that they are very inflexible, and if your estimated average retirement income isn’t enough, you’re stuck with it. If an unforeseen emergency arises that your annuity payment doesn’t cover, you could find yourself in trouble.

You might be better off going down the income drawdown route. It’s a more flexible approach that gives you the option of keeping your savings invested in the market but dipping into it as and when you like. In the meantime, you keep the balance of your money invested so that it can continue to earn interest, thus offsetting the effects of inflation.

Just because you reach retirement age doesn’t mean you have to retire from investing. If, for example, you retire at 60 with 500K in UK terms, you might decide to take several options, including:

  • Contributing to Junior ISAs for your grandchildren. The maximum you can contribute is £9,000 per annum.
  • You could invest some money into income-generating investments for retirement, such as ESG, ETF, or Stocks and Shares ISAs.

The great thing with ISAs is that your money will be safe from the taxman. Not only that, but you can withdraw money when you need it.

Final thoughts

This article was written with investing in mind rather than saving. It is for those who are prepared to accept some degree of risk. The fact of the matter is that you cannot invest money without risk in the UK. There will always be an element of risk.

There is a risk factor to saving as well. It’s not that you will lose your savings as they are pretty safe. But in real terms, your savings will lose value because of inflation, and experience tells us that the amount of interest that even the best savings account offer is well below inflation – especially now with interest at 5.5% and threatening to rise to 7%.

You can learn how to make money by investing, though it is not simple, and mistakes can be costly. The other alternative is to seek advice from independent financial advisers and wealth specialists.

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