The UK base interest rate has been flat for seven years. In October 2008 interest rates sat at 5%, by March 2009 they had been cut to 0.5% and in 2016 they were cut to 0.25%. This record low rate is great for anyone looking for a mortgage, but for individuals that are saving, it makes it very difficult to get a strong return on cash savings.
Research conducted by Moneyfarm showed that UK savers are set to lose £4.1 billion over the year from their cash savings as inflation reduces the value of the £1.2 trillion they have in low interest rate bank accounts and individual savings accounts (ISAs).
There has never been more of a reason for a UK saver to consider investments and, with the £20,000 ISA allowance, the start of the tax year represents a huge opportunity for investors.
Investing is often viewed to be too complicated and savers end up saving in cash. But there are many providers that are making this more straight forward. But savers should be wary, cost and tax need to be considered as anything you pay out impacts real returns.
Start early in the tax year
This year’s ISA allowance is £20,000. That means you can set up a stocks and shares ISA with £20,000 and all interest on that will be free from capital gains and income tax. If you open this account at the start of the tax year you have a full year of benefits.
If you set this account up in ‘ISA season’, at the end of the tax year, you not only miss out on a year of returns but also a year of tax benefits. Setting up your ISA earlier in the tax year can result in more cash in your pocket in the long term.
Keep an eye on cost
Many providers charge management fees, exit fees and even fees for advice. These costs impact your real returns so you need to be careful about how much you are paying.
If you invest this year’s full ISA allowance with Moneyfarm, £20,000, you’ll be charged just £200 in total fees. If you’d achieved 4% returns for the year, your savings would be worth £20,592.
In contrast if you invested this with a traditional provider you could be charged over £450 for the initial advice and set up of your investment portfolio alone1. This number doesn’t include any ongoing management fees and if you withdrew from the account you could be charged even more.
You need to ensure that if you’re paying more, you’re getting more from the service, otherwise you’re losing money unnecessarily.
Look for something innovative
The days of an annual update on an investment are behind us. With a provider like Moneyfarm you can call for an update on performance whenever you want, check online or even download the app and check your investment from the train. If you wanted you could check your investment daily.
Not only is technology improving the transparency of your investment it is also helping the way you invest. From analysing your attitude to risk to helping asset managers choose the most efficient investments. Technology has reduced the cost of the investment process, many ‘robo advisors’ are passing that cost on to the consumer.