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Where and How to Invest Money 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?

Best way to invest for better returns?Through stocks and shares
How to invest short-term in the UK?•High-yield savings account
•Government bonds
•Certificate of deposit
How to invest in property in the UK?•REITS
•Property lease option
•Property crowdfunding
A tax-efficient way to invest money?Invest in a tax wrapper such as ISA or SIPP

How to invest savings

In the UK, when you transfer money into a savings account authorised by the FSCS, up to £85,000 of your funds are safe and returns are guaranteed. For many people, the best way to start saving money is gradually, and they usually 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 2.15% 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 0.10% and 2.65% 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 interest up to 4.6%, 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 the UK inflation, which currently stands at 10.1%. However, some experts predict that it will rise even higher during the course of the year, to 11%.

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 considering your investment risk level.

Investing for beginners: Under 40s guidelines

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 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 a risk factor to consider, but 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 what is compound interest and the power it holds. 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. The growth of long-term investments 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 paying less in 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 Moneyfarm, 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 returns, they tend to earn but also the fact that ISAs 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 and you pay taxes. In other words, it might not be a good 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.

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

The workplace pension 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 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 the pension options available. 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 SIPP pensions in the UK are private pensions. 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 pension and workplace pension. However, many people start financial planning at 35 or later because they’re not satisfied that their state pension and workplace pensions will support the sort of lifestyle they hope to enjoy in their retirement. So, they look elsewhere to things like Lifetime ISAs or Pensions.

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 to 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 have no initial investment but contribute £250 at the end of each 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 £86,639.

Starting AgeProjected value of an Investment ISA
Investing for your retirement in your 20sBy the time you’re 55 – £334,304
Investing for your retirement in your 30sBy the time you’re 55 – £164,594
Investing for your retirement in your 40sBy the time you’re 55 – £69,828
Investing for your retirement in your 50sBy the time you’re 67 – £86,639
Each projected value was calculated using the compound interest rate formula. The table assumes the start date of your ISA is when you are 20, 30, 40 or 50.

Best short-term investments UK

Looking for where to invest money or put your money in the short term, we have assembled some of the best short-term investments in the UK.

High-yield savings accounts: If you want to save money for a little while, put your money in a high-yield savings account. It pays better interest rates than a traditional bank account. For example, high-yield savings accounts pay from 0.5% to 5% interest compared to 0.1% offered by other savings accounts.

Government bonds: Government bonds, also known as Gilts, are debt securities issued by the UK government for a fixed rate of return. However, they are not backed by the FSCS.

Short-term bond funds: Short-term bond funds are funds with a collection of corporate bonds issued by large organisations to finance their investments. These funds pay interest, have a lower interest rate risk, and mature in less than five years.

Equities: Stocks and shares investments are very risky in the short term, and you can lose money due to the stock market volatility, but they can also be rewarding. You can hold short-term investment equities for less than a year. Stocks and shares ISAs and cash ISAs are great ways to invest in equities.

Certificate of deposit: A certificate of deposit is a type of savings account that offers higher interest rates than other bank products. A financial institution or banks issue CDs to depositors. People deposit their money in a CD account for a period of time, ranging from months to five years, and they are paid interest.

Money market funds: Money market funds will help you invest your money in short-term securities such as government, corporate, and municipal bonds. However, MMFs are not insured by the FSCS; the safer option will be to invest in a money market account.

How to invest in property UK with little money

Let’s look at how to invest money in property in the UK with as little money as possible.

Reits: You can invest in a REIT. A real estate investment trust (REIT) is a portfolio comprising of a collection of shares from income-producing commercial and residential properties. Profits are shared with shareholders, and they are usually low risk. You can also purchase REIT shares.

Property lease option: For as little as £1, you can rent a property with the intention of purchasing it at the end of the rental period. An agreement is made between the property owner and renter and at the end of the lease, the renter can either exercise or forfeit the option.

Property crowdfunding: Property crowdfunding allows investors to own an equity share of a property. Investors put money in an investment pool which is used to purchase a property. For example, you can invest in property development where profit is made from the property sale or invest in a buy-to-let property crowdfunding where rental income is shared amongst investors.

Middle-aged guidelines: How to invest for your retirement

Having no retirement plan is likely to lead you into trouble. So 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 taxes 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 investments. 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 FSCS-certified wealth management companies.

Thematic investing also considers ESG factors and can also be used to identify investment themes or companies that are well-positioned to benefit from long-term megatrends around ESG. For instance, a thematic ESG investor might invest in companies that are developing or providing innovative healthcare products or services.

Impact investing: Making a difference while earning a return

As an investor, if you are looking for where to invest money in the UK while making a positive social or environmental impact, then you should consider impact investing. Impact investing is a type of investment where the goal is to produce a financial return while being in alignment with an investor’s values and aims.

Impact investing is seen as part of a broader investment approach known as ESG investing. With impact investing, individuals invest in companies or projects that are working to address specific social or environmental challenges, such as investing in companies that are developing renewable energy technologies.

Don’t overlook investing money in UK products in the short 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 pensions 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 by purchasing an annuity pension.

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 make ISA withdrawals when you need it.

Algorithmic trading & investing: The future of investing

Algorithmic trading, also known as algo-trading, has become increasingly popular in recent years. Instead of traders sitting for hours looking at trading chats, trading is set days or weeks before trade and is executed using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This form of trading takes out taking out the human factor, thus reducing the impact of emotions on trading decisions. Some of the benefits of algorithmic trading include backtesting abilities, fast execution of trades while processing vast amounts of data, and reduced risk of manual errors.

If you don’t know how to invest money in the UK, you have the option of using algorithmic investing. This investment approach is the future, and it is rapidly changing the landscape of investing and shaping its future. Algorithmic trading is a type of trading where trade choices are made using computer algorithms.

If you don’t have the financial knowledge or the time as an investor, you can use a robo advisor to grow your wealth and achieve your financial goals. All that is needed is an investor profile to match your portfolio with your appetite for risk.

According to research done by Investor Index, 58% of 18–34-year-olds and 49% of 35-44 year-olds would prefer using a robo advisor instead of a traditional advisor. Over 60% of investors between the age of 18-44 believe robo advisors are the future of investing. This digital appetite carries over into opinions about the future of financial advice, as 20% have used ChatGPT for financial advice, and 78% believe that ChatGPT would give reliable financial advice in the future. Young investors mostly drive this movement and could potentially change investment habits.

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 10.1% and threatening to rise to 11%.

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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What is the best way to invest money in the UK?

If you want to save money with reasonable interest rates in the UK, then a fixed rate bond or notice savings account is ideal. When it comes to investing money in the UK, use an ISA account and try to utilise the full ISA allowance for tax relief purposes. You can invest in property or overpay your mortgage if there are no penalties for such an action. You can also start building a pension fund via a SIPP to receive tax relief on your SIPP contributions or invest money using a general savings account. The possibilities are endless.

How do beginners invest?

As a novice investor, you can start investing with a robo-advisor or open an investment account and pick tailored investment portfolios that match your investor profile. Beginners can also invest in mutual funds or ETFs instead of picking individual stocks. If you want to invest in individual stocks, you can start with FAANG or reputable companies with a track record. Just do your research on the company you want to invest in.

How do I invest my money?

The first step to investing is to identify your financial goals, risk tolerance and investment, timeframe and how much you want to invest. Then decide if you’re going to do it yourself or need the help and management of a financial advisor. Finally, pick the type of account you want to invest in, such as ISA, SIPP or general investment account and then choose an investment portfolio that matches your risk tolerance.

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.