Chancellor Rachel Reeves is considering different ways to get Brits investing more. It’s not proving a universally popular approach initially, but it has long-term merit in theory.
Reports suggest that the upcoming Budget may include a reduction in the cash ISA allowance from £20,000 to £10,000.
Though the overall ISA allowance would remain the same, anyone wanting to use their full allowance would need to put the excess of £10,000 elsewhere - such as into a stocks and shares ISA.
The reason is that the government is keen to get more people investing – even if it means disincentivising saving.
If you’re wondering why, here’s a run-down of how investing benefits not just you, but the whole of the UK.
How investing benefits you
Quite simply, the core benefit of investing your money – rather than saving it – is that it has more potential to grow.
Savings only grow as much as the interest rate of the account you’ve put them in. Surveys suggest that about a third of adults in the UK keep their savings in their current account, which is unlikely to generate interest at all.
You probably realise that savings generating no interest are not growing. You might not realise that they’re actually shrinking, once you consider the impact of inflation. With the rate of inflation currently around 3.8 per cent, £1,000 in savings would have £38 less buying power after just one year of sitting dormant in your current account.
Investing can allow your money to grow significantly faster than the pace of inflation. For example, the S&P 500 (a major US stock index) has delivered an average annual return of 9.96 per cent for the last 100 years.
That return hasn’t been consistent. The highest total return for a calendar year has been over 50 per cent, while the biggest loss in a calendar year has been over 40 per cent. That’s what we refer to as risk - the potential for ups and downs.
So, to achieve a decent average annual return, you need two things: plenty of time – years of it – and the ability to hold your nerve when the markets are falling, remembering that they’ve always recovered in the past.
How investing benefits the country
Of course, the government’s main concern isn’t how much of your savings you’re losing to inflation. Chancellor Reeves is perhaps more motivated by the economic benefits that an increase in retail investing could bring.
UK investors are likely to invest in UK companies. More investing may mean more capital is available to these companies, which would help them to finance improvements or possible expansion, and improve their growth prospects. As they grow, they might create more UK jobs.
They might also generate more profits. A portion of these profits is often paid out to shareholders, in the form of dividends. If those shareholders are in the UK, that money remains within our economy, whereas if they’re outside the UK, the money leaves our economy.
So, if you, and a lot of people like you, start investing, there could be a wide range of consequences that improve the UK’s economic prospects at the same time as potentially growing your wealth.
Is investing right for you?
Investing isn’t only for some people and not others. Anyone can invest – but it’s not always the most appropriate approach for your goals.
For example, if you’re saving for a holiday in the next year or two, inflation won’t be a big enough threat that you need to take steps to outpace it.
A sudden drop in the financial markets could be a much bigger threat, as you might not have time for your investments to recover before you need to withdraw the money.
So, when you’re deciding whether to invest your money, one of the main things to consider is when you’ll need access to it again.
If that’ll be in the next couple of years, market volatility is probably a bigger worry than inflation – but after about three to five years, the opposite is true.
How to start investing
If you’ve decided that investing is the right approach for you, there are three key steps to get started:
Choose your investment account or tax wrapper.
A stocks and shares ISA is a straightforward and tax-efficient option that’s suitable for a lot of people. Depending on your goals and circumstances, you might also consider a general investment account, Lifetime ISA, or self-invested personal pension.
Choose your provider.
There are dozens of stocks and shares ISA providers in the UK. You might look for one that has a good reputation, positive reviews, a user-friendly interface, low costs, and great customer support.
Choose your investments.
For a beginner, it can be difficult to put together a diversified portfolio at the right risk level. Instead, you could pick a ready-made portfolio recommended by your provider or invest in a global fund. Take some time to research your options - here’s a good place to start!
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
