Soaring inflation has destroyed the feasibility of savings accounts as investment vehicles. Putting and keeping money in a savings account used to be the “laziest” investment method. Looking to make money off the interest, savers didn’t have to do much but ensure that they didn’t need the money they kept in such accounts. That is now history.

Investing in UK

The interest savings accounts pay cannot keep up with the inflation rate. If you keep your money in a savings account, instead of making money, you lose money.

What can you do if you live in the UK and have some money you may be willing to invest?

The Basics of Investing

There is no shortage of investment vehicles and opportunities in the UK. You can pour your money into a pension fund, stocks, or a stocks and shares ISA. You can take care of your investments yourself, or you can hire experts to handle the research and management-related issues for you. You can even opt for less conventional investment methods, like peer-to-peer lending and open-ended investment companies.

Stocks and Shares ISA – Tax Efficiency

Investing in stocks and shares ISAs is one of the best ways to protect your money from taxes.

Individual Savings Accounts allow UK investors to hold cash, unit trusts, or shares and pay no tax on the capital gains, interest, or dividend payments they realize. The solution came as a replacement for tax-exempt special savings accounts and is great for those who want to safeguard their capital gains.

Investment ISAs allow people to build portfolios of shares and other assets. Due to the tax advantages they offer, you should consider investment ISAs before other investment vehicles. Only UK residents over 18 can open stocks and shares ISAs.

Two types of stocks and shares ISAs exist:

  • If you prefer complete control over your investments, a self-invested ISA is the right choice. You decide where you put your money, and you have no one but yourself to blame or congratulate for losses and profits.
  • If you prefer a more hands-off approach to tax-free investing, managed ISAs are for you. Although a fund manager invests your money under this arrangement, you still retain some control. You decide the amount of risk you want to assume and what the purpose of your investment is.

Depending on what your goal is with your investment, you may opt for other ISAs, like a Junior ISA or a Lifetime ISA.

  • You can use a tax-free Junior ISA to save some money for your child. Children can get to the contents of their Junior ISAs once they’re 18. Within the Junior ISA category, you can opt for a Cash ISA or a Stocks and Shares ISA. You can open a Cash ISA and a Stocks and Shares ISA for every child, combining the benefits of both accounts.
  • A Lifetime ISA requires you to use your funds to buy a house, or keep them until you turn 60. The government may pitch in on your Lifetime ISA through some bonuses, provided you qualify.

Padding Your Pension Plan

Although Lifetime ISAs allow you to save for your retirement in a tax-efficient way, you may want to opt for the more traditional way of topping up your pension fund. You can combine both for added benefits or if you deem the combination interesting.

For most people, workplace pension plans represent the best options to boost retirement savings. Pension plans earn tax relief and may allow you to pay in extra without having to boost your pay packet contributions.

If a workplace pension plan is not an option, you can get a private pension plan. Two types of private pension plans exist:

  • If you get a personal pension plan, the entity that provides the pension manages your funds, investing them according to its plans and expertise.
  • A self-invested pension plan allows you to invest your money as you see fit. Making profitable investments requires time, energy, and expertise.

Investing on your Own

If you think you understand investing and can create a profitable portfolio on your own, you can open an account with a share dealing broker and start investing. You can pick how much you want to invest and in which companies.

This option is the most difficult and convoluted investment path, despite its apparent simplicity. Although you can choose to have full control over your investments, you don’t have to. You can ask your broker for investment advice. Or you can have your broker make all the trades on your behalf.

The problem with DIY investing is that it is subject to many fees and taxes. You pay fees and commissions to your broker for the services it provides. The profits you make through dividends or capital gains are also subject to income taxes.

Grouped Investment Options

If you don’t consider yourself an investing expert, you are, perhaps, better off handing your money to experts to invest on your behalf. Grouped investment options take the trouble off your hands and are more likely to result in profits than a DIY portfolio.

  • Open-ended investment companies pool people’s resources to make larger and more diverse investments. The investment funds that operate these OEICs spread the risk and make investments that aren’t accessible to individuals.
  • Unit trusts allow you to buy units in a trust. These units are effectively shares in an investment fund operated by expert fund managers. Unit trusts pool people’s resources and spread the profits. Being open-ended, unit trusts don’t limit how many units an investor can buy.
  • Close-ended investment funds are companies in which you can invest. With the money you invest, the trust makes its own investments and distributes the profits according to how much individuals invest in them. Being close-ended, investment funds limit how much individuals can invest in them.

Peer-to-peer Lending

This is a somewhat unconventional way to invest. You give money to a peer-to-peer provider, who lends it out to those who apply for loans. The profit comes from the interest borrowers pay. This investment method is risky. Sometimes, the platform cannot collect its loans, and you may lose money.

Investing is your best bet to build wealth. It always involves some risk. Typically, the higher the potential rewards, the higher the risk. Low-risk investments offer lower returns.

James West has more than 15 years of experience writing about finance and particularly cryptocurrencies, covering emerging tech, trading and industry trends.

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