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Why your ISA might be stopping you from reaching your goals

You’re a diligent saver that works hard to protect your money to help your family reach those big life goals. So why does it seem like your money is doing nothing but gather dust stuck in your cash ISA?

It can be difficult knowing the best way to grow your money for the future, and as a result many savers accept the small returns from cash ISAs instead of looking to the financial markets to maximise their returns.

But this tactic can prove costly. By ignoring the financial markets, Brits have missed out on £46 billion of returns over the last five years – that’s over £2,000 per cash ISA saver.

The research from UBS Wealth highlights that from the £239 billion saved into cash ISAs, £15.9 billion was generated in returns.

Just £101 billion was put into Stocks and Shares ISAs during the same period, but these investors would have made £26.1 billion had their investments tracked the MSCI World Index between 2012 and 2017.

If all ISA inflows had gone into stocks and shares ISAs instead, investors would have made over £87 billion, benefitting from the strong momentum on the financial markets and compound interest – where returns are reinvested to earn their own returns.

The MSCI index returned nearly four-times as much as the best paying cash ISAs over this five year period, as cash savings accounts suffered from the lowest interest rate environment on record.

Stocks and shares investors are 91% more likely to outperform cash ISAs over a ten year period, research from Barclays shows.

What is an ISA?

A simple way to maximise your returns is to save and invest in an ISA. Protecting your money in a tax wrapper, ISAs allow you to grow your money in a tax-efficient manner.

When saving and investing your money, you could be required to pay tax on your profit over £11,300. Although this might seem like a level of profit out of your reach in the short-term, over the long-term it becomes a lot more realistic.

If you put your money in an ISA, however, you won’t need to pay a thing. You can put up to £20,000 in an ISA each year, and your money can grow and generate income tax-free. The more of your money you keep, the more protection you have against the impact of inflation.

There are many different types of ISAs, but the two main types are cash ISAs and stocks and shares ISAs. Whilst you can split your allowance across a variety of ISAs, you can only open and use one of each type during one financial year.

The ISA tax wrapper can be crucial in helping you offset the impact of inflation and achieve your financial goals quicker. Unfortunately, many people don’t understand how an ISA can help them achieve their goals.

Inflation eating into your returns

As the returns on cash ISAs are failing to keep up with the rate of price growth in the UK, inflation is eating into the purchasing power of this money stuck in cash.

Although inflation has been ahead of the Bank of England’s 2% target for some time (sticking at 3% in January), the best easy access cash ISA returns just 1.2%, according to Money Saving Expert.

Although interest rates are off their record lows, there’s still a significant gap between rates and inflation, which is making it difficult for savers to achieve their goals.

Imagine you put £1,000 in a cash ISA with a 1% return. After 12 months, you’d have £1,100 in your account.

Yet, if inflation stuck at 3%, the value of the initial £1,000 would have fallen to £970, which means you’d have had to make 3% just to retain the purchasing power of your money, let alone make it grow.

Seven tips to investing in a stocks and shares ISA

The financial markets are becoming increasingly popular with savers looking for inflation-beating returns. By taking on a little bit more risk with your money, you can look for bigger returns.

To reach your financial goals, it’s important you invest in the right way for you. By understanding your financial background, what you’re saving for and time horizon, you’re able to build an investor profile that should influence the way you invest.

This investor profile determines the level of risk you want to take with your money. The bigger returns you’re after, the more risk you want to take with your money. If you prioritise protecting the value of your savings, the more risk-averse your portfolio should be.

Understanding your investor profile and how this influences your portfolio are the first steps in achieving your financial goals.

Many savers prefer cash ISAs because of their flexibility and perceived safety, but to find the best returns you might have to lock your money away for a number of years. Cash isn’t as safe as it once was either, with low interest rates and growing inflation.

Today, many stocks and shares ISAs are just as flexible and you can deposit and withdraw money throughout the year without it impacting your annual allowance. It’s also easy to get your money back. You can get your money within seven working days with Moneyfarm.

With the return of volatility, new investors wanting to break away from cash to make their money work harder for them might be put off from investing. It’s important to remember that volatility is a necessary characteristic of the markets and is what allows us to identify opportunities.

Here are seven tips to help you on your way to protecting your money and growing it for the future.

  1. Match with your investor profile – Understand your attitude to risk and how this impacts what you should invest in
  2. Invest for the long-term – Start as early as possible and the longer you have to invest, the bigger the returns you can expect
  3. Maximise your returns with a stocks and shares ISA – Grow your money tax free
  4. Diversification – Spread your money across investments, asset classes and geographies in line with your investor profile to manage the risk in your portfolio
  5. Invest a little and often – Set up a direct debit to make investing hassle-free and maximise your returns from pound cost averaging
  6. Keep it low cost – Keep management fees and charges as low as possible to make sure you keep more much of your money as possible
  7. Focus on the important things in life – Why worry about managing your money when Moneyfarm can do it for you. We’ll match you to an investor profile and low-cost, diversified and flexible portfolio that’s built and managed for you until you want your money back.

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